Headline inflation registered an uptick of +1.6% YoY in January (Dec: +1.0% YoY), slightly lower than consensus estimate (+1.7% YoY). The uptick was driven by rebound in transportation sector due to low base effect that offset the moderation in food & non-alcoholic beverages. In 2020, we maintain our expectation for CPI to trend higher to 2.0% YoY. However, Covid-2019 poses a downside risk to our forecast due to demand and supply shocks. We maintain our expectation for BNM to cut OPR by 25bps in 1H2020 in an effort to strengthen policy support to the economy.

DATA HIGHLIGHTS

Headline inflation edged higher at +1.6% YoY in January (Dec: +1.0% YoY). On a monthly basis, CPI rose +0.1% (Dec: +0.2%), mainly driven by health (+0.2%; Dec: 0.0%), education (0.4%; Dec: 0%), miscellaneous goods and services (0.4%; Dec: - 0.1%)

The uptick in CPI was mainly driven by rebound in transportation (+3.9% YoY; Dec: - 1.9% YoY) due to low base effect. Food & non-alcoholic beverages moderated to 0.9% YoY (Dec: +1.7% YoY) while clothing & footwear continued to register a decline (-1.2% YoY; Dec: -1.0% YoY) and housing, water electricity, gas & other fuels remained steady (1.7% YoY; Dec: 1.7% YoY).

The transport index rebounded to +3.9% YoY (Dec: -1.9% YoY), contributing 0.5ppt to overall inflation. This is the first positive print after 14 months of negative readings as a result from higher RON95 price at RM2.08/litre compared to same period a year ago when RON95 was RM1.95/litre. Despite it being the Chinese New Year month, food inflation moderated to 0.9% YoY (Dec: +1.7% YoY), driven by decline in milk & eggs (-1.0% YoY; Dec: -1.5% YoY), contraction in vegetables (-0.1% YoY; Dec: +5.7% YoY) and moderation in fish & seafood (+0.9% YoY; Dec: +2.5% YoY). On the global front, food inflation moderated slightly to (+11.3% YoY; Dec: +12.5% YoY) due to moderation in meat prices (+14.0% YoY; Dec: +17.0% YoY) and diary prices (+10.2% YoY; Dec: +17.0% YoY).

Services inflation moderated slightly to +1.8% YoY (Dec: +1.9% YoY), due to moderation in furnishing, household equipment & routine household maintenance (+1.2% YoY; Dec: 1.4% YoY) Other sectors such as restaurant & hotels (+1.1% YoY; Dec: +1.1% YoY), education (+1.7% YoY; Dec: +1.7% YoY) and health (1.4% YoY; Dec: 1.4% YoY) maintained their pace of growth.

Meanwhile, core inflation (DOSM) increased to +1.7% YoY (Dec: +1.4% YoY), supported by housing, water, electricity, gas and other fuel price increase (+2.2% YoY; Dec: 2.1% YoY), and rebound in transport prices (+1.4% YoY; Dec: -1.9% YoY).

HLIB’s VIEW

In 2020, for now, 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. Nevertheless, the recent outbreak of coronavirus poses a downside risk to our forecast due to demand and supply shocks especially in 1Q2020. While we acknowledge there are similarities to the SARS episode, the unknown impact of trading activity due to supply chain disruption could pose further downside risk. Hence, we opine the MPC will cut the OPR by 25bps in 1H2020 to strengthen policy support.

Source: Hong Leong Investment Bank Research - 24 Feb 2020