Headline inflation declined at a slower pace of -0.4% YoY in February (Jan: - 0.7% YoY), lower than the consensus estimate of -0.3% YoY. The second month of negative inflation was attributed to the continued decline in transport, clothing & footwear, communication and miscellaneous goods & services price. In the intermediate term, we expect inflation to stabilise due to higher petrol prices in March. Nevertheless, inflation will remain subdued due to policy changes (RON95 price ceiling of RM2.08).

DATA HIGHLIGHTS

Headline inflation declined for a second month, albeit at a slower pace of -0.4% YoY in February (Jan: -0.7% YoY). This was below the consensus estimate of -0.3% YoY. However, on a monthly basis, CPI rebounded by +0.2% (Jan: -0.5%).

The deflation continued to be driven by declines in transport (-6.8% YoY; Jan: -7.8% YoY), clothing & footwear (-3.2% YoY; Jan: -3.3% YoY), communication (-1.2% YoY; Jan: -1.2% YoY) and miscellaneous goods & services (-2.2% YoY; Jan: -2.4% YoY). This offset the rise in restaurant & hotels (+1.3% YoY; Jan: +1.2% YoY), education (+1.3% YoY; Jan: +0.9% YoY) and steady increase in food & non-alcoholic beverages (+1.0% YoY; Jan: +1.0% YoY), alcoholic beverages & tobacco (+1.1% YoY; Jan: +1.1% YoY) and housing, utilities & other fuels (+2.0% YoY; Jan: +2.0% YoY).

The transport sub-sector experienced a slower contraction of -6.8% YoY (Jan: -7.8% YoY) due to high base effect amid lower RON95) petrol prices (Feb 19: RM1.99; Feb 18: RM2.26) and RON97 (Feb 19: RM2.29; Feb 18: RM2.53). However, petrol prices rose on a monthly basis (RON95: RM1.99, Jan: RM1.95; RON97: RM2.29, Jan: RM2.25) following a pickup in global Brent oil prices in February (USD64.43; Jan 19: USD60.24) and appreciation of ringgit (USD/MYR 4.0747; Jan 19: USD/MYR 4.1174).

Food inflation rose at a sustained rate of +1.0% YoY (Jan: +1.0% YoY) amid a rise in milk & eggs prices (+1.8% YoY; Jan: +0.6% YoY) which was offset by moderation in meat (+2.1% YoY; Jan: +2.4% YoY), fish & seafood (+0.1% YoY; Jan: +1.2% YoY) and declines in vegetables (-6.3% YoY; Jan: -7.9% YoY). On the global front, food prices contracted at a faster pace (-2.3% YoY; Jan: -2.2% YoY) due to high base effect. On a monthly basis, global food prices rose by +1.7% MoM (Jan: +1.7% MoM).

Services inflation rose at a steady pace (+1.8% YoY; Jan: +1.8% YoY), driven by higher price levels in restaurant & hotels (+1.3% YoY; Jan: +1.2% YoY) and education sub-sector (+1.3% YoY; Jan: +0.9% YoY). Meanwhile, communication (-1.2% YoY; Jan: -1.2% YoY) and recreation services & culture (-0.4% YoY; Jan: -0.4% YoY) declined at a steady rate.

Core inflation (DOSM) was marginally higher at +0.3% YoY (Jan: +0.2% YoY), mainly supported by the rise in restaurant & hotels (+1.3% YoY; Jan: +1.2% YoY), education (+1.3% YoY; Jan: +0.9% YoY) and rebound in furnishings, household equipment & routine household maintenance prices (+0.1% YoY; Jan: -0.3% YoY).

HLIB’s VIEW

In the intermediate term, we expect inflation to stabilise due to higher petrol prices in March and lower base effect. Nevertheless, inflation will remain subdued due to the imposition of petrol price ceiling in 1H2019. We anticipate price levels to peak in 3Q 2019 due to low base effect and removal of petrol price ceiling cap. Overall, we maintain our 2019 CPI forecast at +1.5% YoY.

Source: Hong Leong Investment Bank Research - 25 March 2019