Headline inflation spiked to +4.7% YoY in Apr (Mar: +1.7% YoY), slightly lower than consensus estimate of +4.9% YoY. The increase was mainly due to low base effect which boosted transport and housing, utilities & other fuels index. Meanwhile, core inflation growth sustained at +0.7% YoY (Mar: +0.7% YoY).

DATA HIGHLIGHTS

Headline inflation spiked to +4.7% YoY in Apr (Mar: +1.7% YoY) due to low base effect, but came in slightly below consensus estimate of +4.9% YoY. On a monthly basis, CPI growth eased to +0.2% (Mar: +0.3%) following decline in clothing & footwear (-0.1%; Mar: 0.0%) and slower growth in transport (+0.1%; Mar: +2.3%), recreation services & culture (+0.2%; Mar: +0.4%) as well as furnishings, household equipment & maintenance (+0.3%; Mar: +0.6%).

The increase in overall index was mainly due to low base effect which boosted transport (+27.0% YoY; Mar: +9.8% YoY) and housing, utilities & other fuels index (+3.1% YoY; Mar: -0.8% YoY) following low domestic fuel prices and electricity bill discounts in the corresponding month last year. All other index groups also increased in Apr, with the exception of clothing & footwear (-0.4% YoY; Mar: -0.3% YoY) and communication (0.0% YoY; Mar: 0.0% YoY).

The surge in transport index (+27.0% YoY; Mar: +9.8% YoY) was attributed to low base effect as average fuel prices in Apr 2020 were the lowest for the year. In Apr 2021, RON 95 averaged RM2.05/litre (Apr 2020: RM1.27/litre), while RON 97 averaged RM2.55/litre (Apr 2020: RM1.57/litre). However, on a monthly basis, growth in transport index slowed (+0.1%; Mar: +2.3%) as RON 97 price moderated (+5.4%; Mar: +7.4%) while RON 95 was unchanged at its price ceiling of RM2.05/litre.

Food inflation rose +1.9% YoY (Mar: +1.5% YoY) following increase in ‘food at home’ (+2.3% YoY; Mar: +1.6% YoY) and ‘food away from home’ (+1.5% YoY; Mar: +1.4% YoY). Most food subgroups recorded larger increase in prices, with the exception of milk, cheese & eggs (+0.5% YoY; Mar: +0.9% YoY) and rice, bread & other cereals (+0.4% YoY; Mar: +0.6% YoY). On the global front, food inflation continued to soar (+30.8% YoY; Mar: +25.0% YoY), partly due to low base effect. All subgroups (meat, vegetable oils, sugar, cereals and dairy) continued to record stronger growth.

The pickup in services inflation (+0.8% YoY; Mar: +0.7% YoY) was contributed by increase in recreation services & culture (+0.7% YoY; Mar: +0.5% YoY), education (+0.2% YoY; Mar: 0.0% YoY) and restaurants & hotels (+0.2% YoY; Mar: 0.0% YoY). Communication services remained flat.

Core inflation (DOSM) sustained at +0.7% YoY (Mar: +0.7% YoY), supported by the increase in furnishings, household equipment & maintenance (+1.6% YoY; Mar: +0.9% YoY), recreation services & culture (+0.7% YoY; Mar: +0.5% YoY), education (+0.2% YoY; Mar: 0.0% YoY) and restaurants & hotels (+0.2% YoY; Mar: 0.0% YoY) which offset the continued decline in clothing & footwear (-0.4% YoY; Mar: -0.3% YoY).

HLIB’s VIEW

The spike in headline inflation is expected to be transitory, with inflation projected to moderate in 3Q21 onwards as low base effect dissipates. Meanwhile, core inflation remained muted, which points to continued spare capacity in the economy. On this note, we expect BNM to maintain OPR at the current low level throughout 2021.

Source: Hong Leong Investment Bank Research - 24 May 2021