Headline inflation registered an uptick of +1.0% YoY in December (Nov: +0.9% YoY), in line with the consensus estimate. The uptick was driven by increase in food & non-alcoholic beverages alongside a smaller decline in transport prices. For 2019, headline inflation averaged +0.7% YoY (2018: +1.0% YoY), in line with our estimate. We maintain our expectation for inflation to average +2.0% YoY in 2020, premised on the assumption that Brent oil price averages USD60/pb and ringgit averages USD/MYR 4.15-4.20 in 2020.

DATA HIGHLIGHTS

Headline inflation edged higher at +1.0% YoY in December (Nov: +0.9% YoY), in line with the consensus estimate. On a monthly basis, CPI rose +0.2% (Nov: +0.1%), mainly driven by food & non-alcoholic beverages (+0.5%; Nov: 0%) and restaurants & hotels (+0.2%; Nov: +0.1%).

The uptick in CPI was driven by increase in the index of food & non-alcoholic beverages (+1.7% YoY; Nov: +1.5% YoY) and smaller decline in transport (-1.9% YoY; Nov: -2.4% YoY). This offset the moderation across alcoholic beverages & tobacco (+0.2% YoY; Nov: +0.4% YoY), recreation services & culture (+0.6% YoY; Nov: +0.8% YoY).

The transport index declined, albeit at a slower pace of -1.9% YoY (Nov: -2.4% YoY) as RON95 petrol price remained fixed at RM2.08/litre, lower than the same period in 2018 (Dec 18: RM2.20).

Food inflation rose +1.7% YoY (Nov: +1.5% YoY), driven by a surge in vegetables (+5.7% YoY; Nov: +2.0% YoY) and fish & seafood prices (+2.5% YoY; Nov: +1.3% YoY). Prices for fruits (+1.4% YoY; Nov: +1.1% YoY) and rice, bread & other cereals (+0.6% YoY; Nov: +0.5% YoY) also rose, offsetting the decline in meat (-3.0% YoY; Nov: +0.5% YoY) and milk & eggs (-1.5% YoY; Nov: +1.4% YoY). On the global front, food inflation continued to rise (+12.5% YoY; Nov: +9.6% YoY) amid higher prices for meat, dairy, oils and sugar.

Services sector growth stood at +1.9% YoY (Nov: +1.9% YoY), supported by slight pickup in education (+1.7% YoY; Nov: +1.6% YoY) and stable growth in communication (+1.5% YoY; Nov: +1.5% YoY) as well as restaurants & hotels (+1.1% YoY; Nov: +1.1% YoY), which offset the moderation in recreation services & culture (+0.6% YoY; Nov: +0.8% YoY).

Meanwhile, core inflation (DOSM) sustained at +1.4% YoY (Nov: +1.4% YoY), mainly supported by slight pickup in education (+1.7% YoY; Nov: +1.6% YoY) and smaller decline in transport (-1.9% YoY; Nov: -2.4% YoY), offsetting the moderation in recreation services & culture (+0.6% YoY; Nov: +0.8% YoY) and furnishings, household equipment & maintenance (+1.4% YoY; Nov: +1.5% YoY).

HLIB’s VIEW

In 2020, we maintain our expectation for headline inflation to average higher but remain modest at +2.0% YoY (2019: +0.7% YoY), premised on the assumption that Brent oil price averages USD60/pb and ringgit averages USD/MYR 4.15-4.20 in 2020. With the government’s announcement to delay the petrol subsidy program, our 2.0% inflation forecast remains broadly intact if the delay is within 1Q20. However, should government delay the implementation to mid-year, our 2020 inflation forecast would be lowered to 1.7% YoY, ceteris paribus.

Source: Hong Leong Investment Bank Research - 29 Jan 2020