Headline inflation posted a softer decline in December (-1.4% YoY; Nov: -1.7% YoY), slightly below the consensus estimate of -1.3% YoY. The decrease in overall index stemmed from decline in transport, housing, utilities & fuels, clothing & footwear and restaurants & hotels. Meanwhile, core inflation growth steadied at +0.7% YoY (Nov: +0.7% YoY). CPI for the year 2020 decreased by - 1.2% YoY (2019: +0.7% YoY), while the core index maintained at +1.1% YoY (2019: +1.1% YoY).

DATA HIGHLIGHTS

CPI remained in negative territory for the tenth straight month in December (-1.4% YoY; Nov: -1.7% YoY), slightly below the consensus estimate of -1.3% YoY. Meanwhile, CPI rebounded on a monthly basis (+0.5%; Nov: -0.2%), driven by increase in food & non-alcoholic beverages (+0.5%; Nov: -0.1%) and transport (+3.0%; Nov: -1.0%). In 2020, CPI decreased by -1.2% YoY (2019: +0.7% YoY).

The softer decline in CPI stemmed from smaller decrease in transport (-8.4% YoY; Nov: -11.1% YoY) and clothing & footwear (-0.4% YoY; Nov: -0.5% YoY). Furnishings, household equipment & maintenance (-0.1% YoY; Nov: -0.1% YoY) and housing, utilities & fuels (-3.3% YoY; Nov: -3.3% YoY) declined at a steady pace, while restaurants & hotels fell -0.2% YoY (Nov: 0.0% YoY). These groups contributed 48.6% to the overall index.

The transport index registered a softer decline of -8.4% YoY (Nov: -11.1% YoY) following the smaller drop in RON95 (-15.7% YoY; Nov: -21.3% YoY) and RON97 (- 21.7% YoY; Nov: -26.4% YoY) relative to the previous year. However, the index rebounded on a monthly basis (+3.0%; Nov: -1.0%) owing to the pickup in global Brent oil price (USD50.26; Nov: USD43.98).

Food inflation sustained (+1.4% YoY; Nov: +1.4% YoY) amid steady growth in ‘food away from home’ (+1.6% YoY; Nov: +1.6% YoY) and uptick in ‘food at home’ (+1.3% YoY; Nov: +1.2% YoY). Higher prices of vegetables (+3.6% YoY; Nov: +3.0% YoY), meat (+2.2% YoY; Nov: +1.1% YoY) and oils & fats (+1.9% YoY; Nov: +1.7% YoY) were offset by moderation in fruits (+1.2% YoY; Nov: +1.7% YoY) and fish & seafood (+0.9% YoY; Nov: +1.6% YoY). Globally, food inflation moderated slightly (+6.5% YoY; Nov: +6.8% YoY) due to lower meat prices and softer growth in sugar prices.

Services inflation held at +0.9% YoY (Nov: +0.9% YoY) as the uptick in recreation services & culture (+0.2% YoY; Nov: +0.1% YoY) was offset by the decrease in restaurants & hotels (-0.2% YoY; Nov: 0.0% YoY). Growth steadied for education (+0.6% YoY; Nov: +0.6% YoY) but was flat for communication (Nov: 0.0% YoY).

Core inflation (DOSM) steadied at +0.7% YoY (Nov: +0.7% YoY) as the increase in recreation services & culture (+0.2% YoY; Nov: +0.1% YoY) offset the decline in restaurants & hotels (-0.2% YoY; Nov: 0.0% YoY). In 2020, core CPI maintained at +1.1% YoY (2019: +1.1% YoY).

HLIB’s VIEW

Headline inflation is expected to normalise to +2.5% YoY in 2021 following the lapse of electricity bill discounts and higher oil price expectations, premised on Brent oil averaging USD55/pb and average ringgit assumption of USD/MYR4.00. Nevertheless, we expect BNM to maintain OPR at the current level as challenges from virus containment and vaccine roll-outs pose downside risks to the growth outloo

Source: Hong Leong Investment Bank Research - 25 Jan 2021