Headline inflation rose +1.5% YoY in Jun (May: +0.2% YoY), in line with the consensus estimate. The tax holiday period in Jun 2018 led to an increase in the index of main groups including food & non-alcoholic beverages, housing, utilities & other fuels, furnishings, household equipment & maintenance and recreation services & culture. In 2Q19, headline inflation rebounded by +0.7% YoY (1Q19: -0.3% YoY). Maintain 2019 inflation forecast at +1.0% YoY.

DATA HIGHLIGHTS

Headline inflation was up +1.5% YoY in Jun (May: +0.2% YoY), the fastest pace in 13 months and in line with the consensus estimate. However, CPI was unchanged on a monthly basis (May: +0.2%). On a quarterly basis, CPI rebounded by +0.7% YoY in 2Q19 (1Q19: -0.3% YoY).

The rise in inflation was mainly driven by low base effect arising from the tax holiday period which started in Jun 2018. This led to an increase in the index of main groups including food & non-alcoholic beverages (+2.3% YoY; May: +1.2% YoY), housing, utilities & other fuels (+2.3% YoY; May: +1.8% YoY), furnishings, household equipment & maintenance (+3.1% YoY; May: +0.5% YoY) and recreation services & culture (+2.7% YoY; May: -0.4% YoY). This offset the decline in transport (-2.1% YoY; May: -2.5% YoY) and clothing & footwear (-0.7% YoY; May: -3.2% YoY), albeit at a slower pace.

Prices in the transport sector continued to decline (-2.1% YoY; May: -2.5% YoY) due to the ceiling price cap imposed on RON95 petrol (Jun 19: RM2.08; Jun 18: RM2.20). On a monthly basis, transport prices also declined (-0.3%; May: +0.2%) as RON97 prices fell (RM2.51; May: RM2.75) while RON95 prices remained unchanged (RM2.08; May: RM2.08). The fall in RON97 price was in line with lower price of global Brent oil during the month (USD63.03; May: USD70.30).

Apart from low base effect, the rise in food inflation (+2.3% YoY; May: +1.2% YoY) may also be attributed to the Hari Raya festive period in June. The higher prices of rice, bread & other cereals (+0.8% YoY; May: -0.3% YoY), milk & eggs (+2.5% YoY; May: +0.7% YoY) and vegetables (+5.2% YoY; May: +4.5% YoY) offset the moderation in fish & seafood (+0.5% YoY; May: +0.9% YoY) and slower decline in meat prices (-1.8% YoY; May: -3.1% YoY). On the global front, food prices rebounded by +0.2% YoY (May: -1.3% YoY) after a year of declining prices.

Services inflation rose +2.6% YoY (May: +1.6% YoY), driven by rebound in prices of recreation services & culture (+2.7% YoY; May: -0.4% YoY), communication services (+2.1% YoY; May: -0.9% YoY) and pickup in prices of restaurants & hotels (+1.6% YoY; May: +0.6% YoY).

Core inflation (DOSM) accelerated to +1.9% YoY (May: +0.4% YoY) due to the rise in food & non-alcoholic beverage prices (+3.0% YoY; May: +1.5% YoY), furnishings, household equipment & maintenance (+3.1% YoY; May: +0.5% YoY) and rebound in recreation services & culture (+2.7% YoY; May: -0.4% YoY) and communication services (+2.1% YoY; May: -0.9% YoY).

HLIB’s VIEW

In light of delay in the implementation of petrol price subsidy, we anticipate inflation to remain modest. We maintain our inflation to average +1.0% YoY in 2019 (2018: +1.0% YoY), pending further details of petrol price subsidy implementation.

Source: Hong Leong Investment Bank Research - 25 Jul 2019