CPI continued to fall in July, albeit at a lower rate (-1.3% YoY; Jun: -1.9% YoY), in line with the consensus estimate. The softer decline was mainly aided by smaller contraction in transport index. Meanwhile, core inflation growth eased to +1.1% YoY (Jun: +1.2% YoY).

DATA HIGHLIGHTS

Negative headline inflation continued for the fifth consecutive month in July, albeit at a lower rate (-1.3% YoY; Jun: -1.9% YoY), in line with the consensus estimate. On a monthly basis, CPI growth moderated to +0.7% (Jun: +1.0%), owing to slower growth in transport (+4.9%; Jun: +7.8%) and food & non-alcoholic beverages (+0.1%; Jun: +0.4%), which offset the pickup in furnishings, household equipment & maintenance (+0.3%; Jun: +0.1%) and education index (+0.4%; Jun: -0.2%).

The smaller decline in CPI was aided by pickup in education (+1.2% YoY; Jun: +0.8% YoY), recreation services & culture (+0.7% YoY; Jun: +0.6% YoY), alcoholic beverages & tobacco (+0.3% YoY; Jun: +0.2% YoY) and smaller contraction in transport index (- 10.3% YoY; Jun: -14.3% YoY). Food & non-alcoholic beverages moderated (+1.4% YoY; Jun: +1.6% YoY), while the decline in housing, utilities & fuels sustained (-2.6% YoY; Jun: -2.6% YoY).

The transport index declined further (-10.3% YoY; Jun: -14.3% YoY) on the back of lower RON95 (RM1.69; Jul 2019: RM2.08) and RON97 (RM1.99; Jul 2019: RM2.56) fuel prices relative to the previous year. On a monthly basis, the index moderated to +4.9% (Jun: +7.8%), consistent with slower growth in global Brent oil price for the month (+6.0%; Jun: +25.8%).

Food inflation eased to +1.4% YoY (Jun: +1.6% YoY) amid softer growth for ‘food at home’ (+1.2% YoY; Jun: +1.6% YoY) and ‘food away from home’ (+1.6% YoY; Jun: +1.8% YoY). Under ‘food at home’, fish & seafood (+0.8% YoY; Jun: +0.7% YoY) and vegetables edged higher (+2.7% YoY; Jun: +2.1% YoY) but was offset by weaker growth across other food subgroups. On the global front, food prices declined at a slower pace (-0.9% YoY; Jun: -2.3% YoY), owing to higher dairy and vegetable oil prices.

Services inflation held at +1.3% YoY (Jun: +1.3% YoY). The pickup in education (+1.2% YoY; Jun: +0.8% YoY) and recreation services & culture (+0.7% YoY; Jun: +0.6% YoY) were offset by the slight moderation in restaurants & hotels (+0.2% YoY; Jun: +0.3% YoY).

Core inflation (DOSM) eased to +1.1% YoY (Jun: +1.2% YoY) amid more moderate growth in food & non-alcoholic beverages (+1.2% YoY; Jun: +1.3% YoY) and restaurants & hotels (+0.2% YoY; Jun: +0.3% YoY). This offset the uptick in education (+1.2% YoY; Jun: +0.8% YoY) and recreation services & culture (+0.7% YoY; Jun: +0.6% YoY).

HLIB’s VIEW

On a YTD basis (Jan-Jul 2020), headline inflation stands at -0.9% YoY, while headline inflation excluding fuel (petrol RON95, RON97, diesel) is at +0.6% YoY. Nevertheless, as oil prices remain weak alongside lower electricity prices until end-2020, muted inflationary pressure is anticipated to persist throughout 2H20. 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 - 19 Aug 2020