Headline inflation eased to +1.4% YoY in July (Jun: +1.5% YoY), slightly below the consensus estimate of +1.5% YoY. The softer inflation rate was mainly due to decline in clothing & footwear, transport and moderation in housing, utilities & other fuels which offset the rise in food & beverages prices. In 3Q19, we anticipate inflation to peak before normalising in the following quarter.

DATA HIGHLIGHTS

Headline inflation slightly moderated to +1.4% YoY in July (Jun: +1.5% YoY), narrowly missing the consensus estimate of +1.5% YoY. Meanwhile, on a monthly basis, CPI posted a marginal uptick of +0.1% (Jun: 0.0%), supported by higher food & beverage and transport prices.

Inflation eased on the back of a faster decline in clothing & footwear (-1.1% YoY; Jun: -0.7% YoY), slower decline in transport (-1.9% YoY; Jun: -2.1% YoY) and moderation in housing, utilities & other fuels (+1.9% YoY; Jun: +2.3% YoY) as well as recreation services & culture (+2.4% YoY; Jun: +2.7% YoY). This offset the rise in food & non alcoholic beverages (+2.4% YoY; Jun: +2.3% YoY), alcoholic beverages & tobacco (+2.3% YoY; Jun: +2.1% YoY) and furnishings, household equipment & maintenance (+3.3% YoY; Jun: +3.1% YoY).

In the transport sector, price levels continued its declining trend (-1.9% YoY; Jun: - 2.1% YoY) as the ceiling price cap on RON95 petrol was still in place (Jul 19: RM2.08; Jul 18: RM2.20). However, transport prices were higher on a monthly basis (+0.2%; Jun: -0.3%) due to higher RON97 petrol prices (RM2.56; Jun: RM2.51). This was in line with the rise in global Brent oil in July (USD64.21; Jun: USD63.04).

Food inflation rose +2.4% YoY (Jun: +2.3% YoY), driven by higher prices for fruits (+2.5% YoY; Jun: +1.1% YoY) and milk & eggs (+2.6% YoY; Jun: +2.5% YoY) which offset moderation in vegetables (+4.7% YoY; Jun: +5.2% YoY), rice, bread & other cereals (+0.7% YoY; Jun: +0.8% YoY), fish & seafood (+0.4% YoY; Jun: +0.5% YoY) and decline in meat prices (-1.6% YoY; Jun: -1.8% YoY), albeit at a slower pace. Similarly, on the global front, food prices also picked up (+2.3% YoY; Jun: 0.0%).

Inflation in the services sector ticked higher at +2.7% YoY (Jun: +2.6% YoY), driven by rise in restaurants & hotels (+1.7% YoY; Jun: +1.6% YoY) as well as sustained increase in communication services (+2.1% YoY; Jun: +2.1% YoY) and education (+1.4% YoY; Jun: +1.4% YoY), which offset the moderation in recreation services & culture (+2.4% YoY; Jun: +2.7% YoY).

Meanwhile, core inflation (DOSM) rose by +2.0% YoY (Jun: +1.9% YoY), due to increase in price levels for food & non-alcoholic beverages (+3.1% YoY; Jun: +3.0% YoY), housing, utilities & other fuels (+2.1% YoY; Jun: +2.0% YoY), furnishings, household equipment & maintenance (+3.3% YoY; Jun: +3.1% YoY) and restaurants & hotels (+1.7% YoY; Jun: +1.6% YoY), offsetting the decline in clothing & footwear (- 1.1% YoY; Jun: -0.7% YoY) and transport prices (-1.9% YoY; Jun: -2.0% YoY).

HLIB’s VIEW

Inflation is anticipated to peak in 3Q 2019 due to low base effect, following the introduction of consumption tax holiday in Jun – Aug 2018. In 4Q 2019, we maintain our expectation for inflation to ease against the environment of low global oil prices and modest inflationary pressures. Nevertheless, the dynamics of inflation is largely dependent on the final mechanism and timing of the petrol price subsidy mechanism that is anticipated to be announced in the near future.

Source: Hong Leong Investment Bank Research - 15 Aug 2019