Headline inflation remained steady at +0.2% YoY in May (Apr: +0.2% YoY), lower than the consensus estimate of +0.3% YoY. Inflation was mainly supported by higher food, beverages & tobacco prices amid smaller decline in transport sector which offset the moderation in prices for housing, utilities & other fuels. In 3Q19, we expect headline inflation to peak due to low base effect during GST tax holiday period in Jun-Aug 2018.

DATA HIGHLIGHTS

Headline inflation remained at the +0.2% YoY mark in May (Apr: +0.2% YoY) for the third consecutive month following two months of deflation. CPI was slightly below the consensus estimate of +0.3% YoY. Meanwhile, on a monthly basis, CPI picked up by +0.2% (Apr: 0.0%).

The stable inflation rate was supported by higher prices of food & non-alcoholic beverages (+1.2% YoY; Apr: +1.1% YoY), alcoholic beverages & tobacco (+1.3% YoY; Apr: +1.2% YoY), furnishings, household equipment & routine household maintenance (+0.5% YoY; Apr: +0.2% YoY) amid smaller decline in transport prices (- 2.5% YoY; Apr: +2.6% YoY) and communication services (-0.9% YoY; Apr: -1.1% YoY). This offset the moderation in prices of housing, utilities & other fuels (+1.8% YoY; Apr: +2.0% YoY) and restaurant & hotels (+0.6% YoY; Apr: +0.8% YoY).

In the transport sector, prices continued to decline, albeit at a slower pace (-2.5% YoY; Apr: -2.6% YoY) due to the ceiling price cap placed on RON95 petrol (May 19: RM2.08; May 18: RM2.20). On a monthly basis, RON95 prices remained unchanged (RM2.08; Apr: RM2.08) while RON97 prices rose (RM2.75; Apr: RM2.69) despite lower global Brent oil prices (USD70.30; Apr: USD71.64). This was attributed to depreciation in ringgit during the month (USD/MYR 4.1697; Apr: USD/MYR 4.1144).

Food inflation rose +1.2% YoY (Apr: +1.1% YoY), driven by higher prices of vegetables (+4.5% YoY; Apr: +2.2% YoY) and fish & seafood (+0.9% YoY; Apr: +0.2% YoY) which offset the moderation in milk & eggs (+0.7% YoY; Apr: +1.9% YoY) and decline in oils & fats (-1.2% YoY; Apr: -1.0% YoY), meat (-3.1% YoY; Apr: -3.6% YoY) and rice, bread & other cereals prices (-0.3% YoY; Apr: -0.4% YoY). On the global front, food prices were rose at a moderate pace of +1.2% (Apr: +1.6%) but was still below its level in May 2018 by -1.9% YoY (Apr: -2.1% YoY). Services inflation moderated to +1.6% YoY (Apr: +1.8% YoY) as the steady prices for education (+1.2% YoY; Apr: +1.2% YoY) was offset by moderation in restaurant & hotels (+0.6% YoY; Apr: +0.8% YoY), sustained decline in recreation services & culture prices (-0.4% YoY; Apr: -0.4% YoY) and slower decline in communication services prices (-0.9% YoY; Apr: -1.1% YoY).

Core inflation (DOSM) slightly eased to +0.4% YoY (Apr: +0.5% YoY) due to moderation in prices of housing, utilities & fuels prices (+2.0% YoY; Apr: +2.3% YoY) which offset higher furnishings, household equipment & routine household maintenance prices (+0.5% YoY; Apr: +0.2% YoY).

HLIB’s VIEW

In the near term, we expect inflation to remain modest due to lower price ceiling cap for RON95 but expect it to peak in 3Q19 due to low base effect during GST holiday period. Nevertheless, underlying inflation is anticipated to remain firm amid stable labour market conditions and positive wage growth. We also expect BNM to maintain OPR at 3.00%, unless conditions in the external environment deteriorate significantly.

Source: Hong Leong Investment Bank Research - 27 Jun 2019