Headline inflation grew at a softer pace of +1.1% YoY in September (Aug: +1.5% YoY), lower than the consensus estimate of +1.3% YoY. As anticipated, inflation began to normalise at the start of 3Q 2019 following the implementation of SST in Sep 2018. The index slowed mainly on the back of moderation in food & beverages, housing & utilities and decline in transport.

DATA HIGHLIGHTS

Headline inflation softened to +1.1% YoY in September (Aug: +1.5% YoY), which came in below the consensus estimate of +1.3% YoY. Meanwhile, CPI was unchanged on a monthly basis (Aug: +0.2%).

Coming off from its peak in the last three months, inflation began to normalise as expected, following the implementation of SST in Sep 2018. This led to moderation across most index groups including food & non-alcoholic beverages (+2.2% YoY; Aug: +2.6% YoY), housing, utilities & other fuels (+1.6% YoY; Aug: +1.8% YoY), and restaurants & hotels (+1.4% YoY; Aug: +1.7% YoY), as well as decline in communication services (-0.1% YoY; Aug: +2.2% YoY), which offset the rise in education (+1.8% YoY; Aug: +1.4% YoY) and miscellaneous goods and services (+2.7% YoY; Aug: +2.5% YoY).

Prices continued to decline in the transport sector (-2.2% YoY; Aug: -2.1% YoY) in conjunction with the petrol price cap placed on RON95 (Sep 19: RM2.08; Sep 18: RM2.20). However, transport prices inched up on a monthly basis (+0.1%; Aug: - 0.1%) due to the rise in RON97 petrol price (RM2.60; Aug: RM2.51). This was in line with the pickup in global Brent oil price in September (USD62.29; Aug: USD59.50).

Food inflation moderated to +2.2% YoY (Aug: +2.6% YoY) as prices eased for vegetables (+2.6% YoY; Aug: +3.2% YoY), fruits (+1.4% YoY; Aug: +1.7% YoY) and milk & eggs (+2.6% YoY; Aug: +3.4% YoY). Oil & fat prices recorded a marginal decline (-0.1% YoY; Aug: 0.0%). This offset the rise in meat (+2.0% YoY; Aug: +0.6% YoY) and fish & seafood prices (+1.6% YoY; Aug: +0.9% YoY). Food away from home moderated to +3.2% YoY (Aug: +4.4% YoY).

Services sector eased (+1.9% YoY; Aug: +2.6% YoY), due to decline in communication (-0.1% YoY; Aug: +2.2% YoY), moderation in restaurants & hotels (+1.4% YoY; Aug: +1.7% YoY), offsetting the rise in education (+1.8% YoY; Aug: +1.4% YoY). Miscellaneous goods and services prices picked up to +2.7% YoY (Aug: +2.5% YoY) due largely to increase in jewellery rings & precious stones and other appliances for personal care.

Core inflation (DOSM) eased to +1.5% YoY (Aug: +2.0% YoY), weighed down by moderation in food & non-alcoholic beverages (+2.4% YoY; Aug: +3.1% YoY), furnishings, household equipment & maintenance (+2.1% YoY; Aug: +3.2% YoY), recreation services & culture (+0.8% YoY; Aug: +2.3% YoY) and decline in transport (- 2.2% YoY; Aug: -2.1% YoY) and communication (-0.1% YoY; Aug: +2.2% YoY).

HLIB’s VIEW

Inflation has remained relatively modest at +0.6% YoY in Jan-Sep 2019 (Jan-Sep 2018: +1.2% YoY). Going forward, we maintain our expectation for headline inflation to reach +0.7% YoY for 2019 as RON95 petrol prices remain fixed at RM2.08/litre, leading to lower transportation growth on an annual basis. With the assumption that trade uncertainty will continue to affect global growth and domestic economy, we maintain our expectation for BNM to reduce OPR by 1Q20.

Source: Hong Leong Investment Bank Research - 24 Oct 2019