CPI remained in negative territory in June, albeit at a lower rate (-1.9% YoY; May: -2.9% YoY), slightly below the consensus estimate of -1.8% YoY. The softer decline was mainly aided by increase in food & non-alcoholic beverages and smaller contraction in transport index. Meanwhile, core inflation growth picked up (+1.2% YoY; May: +1.1% YoY).

DATA HIGHLIGHTS

Headline inflation declined at a softer pace of -1.9% YoY in June (May: -2.9% YoY), slightly below the consensus estimate of -1.8% YoY. On a monthly basis, CPI rose +1.0% (May: +0.3%), driven by a jump in transport index (+7.8%; May: +1.0%) and uptick in food & non-alcoholic beverages (+0.4%; May: +0.3%) as well as furnishings, household equipment & maintenance (+0.1%; May: -0.2%).

On an annual basis, the smaller decline in CPI was aided by increase in food & non alcoholic beverages (+1.6% YoY; May: +1.2% YoY), miscellaneous goods & services (+3.0% YoY; May: +2.8% YoY) and smaller contraction in transport index (-14.3% YoY; May: -20.8% YoY). Miscellaneous goods & services were driven by personal effects, particularly jewellery rings & precious stones (+31.9% YoY; May: +29.9% YoY).

The transport index continued to decline (-14.3% YoY; May: -20.8% YoY) as RON95 and RON97 fuel prices averaged lower compared to the prior year at RM1.55 (June 2019: RM2.08) and RM1.85 (June 2019: RM2.51) respectively. On a monthly basis, transport index accelerated (+7.8%; May: +1.0%), in tandem with the pickup in global Brent oil prices (USD40.77; May: USD32.41).

Food inflation grew +1.6% YoY (May: +1.2% YoY), driven by ‘food at home’ (+1.6% YoY; May: +1.1% YoY) and ‘food away from home’ (+1.8% YoY; May: +1.6% YoY). The increase in ‘food at home’ was attributed to higher prices of meat (+5.7% YoY; May: +2.7% YoY), oils & fats (+1.4% YoY; May: +1.2% YoY), fruits (+1.1% YoY; May: +0.9% YoY) and rice, bread & other cereals (+0.9% YoY; May: +0.7% YoY). Meanwhile, vegetable prices moderated (+2.1% YoY; May: +2.4% YoY). On the global front, food inflation posted its first MoM increase since Jan 2020, driven by higher vegetable oil prices.

Services inflation recorded an uptick (+1.3% YoY; May: +1.2% YoY), supported by steady growth in communication (+1.6% YoY; May: +1.6% YoY) which offset the moderation in health (+1.1% YoY; May: +1.2% YoY), education (+0.8% YoY; May: +1.0% YoY), recreation services & culture (+0.6% YoY; May: +0.7% YoY) and restaurants & hotels (+0.3% YoY; May: +0.9% YoY).

Core inflation (DOSM) also picked up (+1.2% YoY; May: +1.1% YoY) amid increase in food & non-alcoholic beverages (+1.3% YoY; May: +1.1% YoY). This offset the moderation in education (+0.8% YoY; May: +1.0% YoY), recreation services & culture (+0.6% YoY; May: +0.7% YoY) and restaurants & hotels (+0.3% YoY; May: +0.9% YoY).

HLIB’s VIEW

In Jan-June 2020, headline inflation averaged lower at -0.8% YoY (Jan-May 2020: - 0.6% YoY). Inflationary pressure is expected to remain weak following weak trajectory of oil prices and 3-month extension for discount on electricity bill for households to Dec 2020. Following sluggish economic and low inflation prospects, we maintain our expectation for BNM to reduce OPR by another 25bps to 1.5% as early as September MPC meeting

Source: Hong Leong Investment Bank Research - 23 Jul 2020