Headline inflation continued to moderate to +2.2% YoY in Jul (Jun: +3.4% YoY), lower than consensus estimate of +2.9% YoY. CPI continued to be driven by low base effect which supported growth in transport, furnishings, household equipment & maintenance and housing, utilities & other fuels. Meanwhile, core inflation sustained at +0.7% YoY (Jun: +0.7% YoY).

DATA HIGHLIGHTS

Headline inflation continued to moderate to +2.2% YoY in Jul (Jun: +3.4% YoY), lower than consensus estimate of +2.9% YoY. On a monthly basis, CPI declined by -0.6% (Jun: +0.1%). This was attributed to negative growth in housing, utilities & other fuels (-2.5%; Jun: 0.0%) due to the electricity bill discount given to consumers from Jul-Sep 2021. Alcoholic beverages & tobacco also recorded a decline (-0.1%; Jun: +0.1%).

CPI continued to be driven by low base effect which supported growth in transport (+11.6% YoY; Jun: +16.6% YoY), furnishings, household equipment & maintenance (+1.7% YoY; Jun: +2.0% YoY) and housing, utilities & other fuels (+0.7% YoY; Jun: +3.2% YoY), albeit by a smaller magnitude. Meanwhile, food & non-alcoholic beverages growth sustained at +1.3% YoY (Jun: +1.3% YoY).

The transport index (+11.6% YoY; Jun: +16.6% YoY) continued to be supported by low retail fuel prices in the prior year. Retail fuel prices eased but still recorded double-digit growth; RON 95 grew +21.1% YoY (Jun: +32.3% YoY), while RON 97 rose +36.1% YoY (Jun: +43.0% YoY). On a monthly basis, the index rebounded by +0.3% (Jun: -0.2%), in line with the rise in Brent oil price during the month (USD74.29; Jun: USD73.41).

Food inflation sustained at +1.3% YoY (Jun: +1.3% YoY) amid steady growth in both ‘food at home’ (+1.3% YoY; Jun: +1.3% YoY) and ‘food away from home’ (+1.3% YoY; Jun: +1.3% YoY). Most food subgroups recorded positive growth, with the exception of meat (-0.5% YoY; Jun: -0.9% YoY). Oils & fats recorded the highest increase in prices (+4.1% YoY; Jun: +4.0% YoY), followed by fish & seafood (+3.4% YoY; Jun: +3.3% YoY). This was consistent with the global food price index (+31.0% YoY; Jun: +33.8% YoY), of which growth was primarily led by vegetable oils (+66.7% YoY; Jun: +81.8% YoY).

Services inflation eased to +0.7% YoY (Jun: +0.8% YoY). Slower growth in education (+0.1% YoY; Jun: +0.5% YoY) offset the pickup in restaurants & hotels (+0.7% YoY; Jun: +0.5% YoY). Meanwhile, recreation services & culture maintained at +0.6% YoY (Jun: +0.6% YoY). Communication remained unchanged (0.0% YoY; Jun: 0.0% YoY).

Core inflation (DOSM) sustained at +0.7% YoY (Jun: +0.7% YoY) as moderation in furnishings, household equipment & maintenance (+1.7% YoY; Jun: +2.0% YoY), food & non-alcoholic beverages (+1.1% YoY; Jun: +1.2% YoY), health (+0.4% YoY; Jun: +0.5% YoY) and education (+0.1% YoY; Jun: +0.5% YoY) offset the pickup in restaurants & hotels (+0.7% YoY; Jun: +0.5% YoY).

HLIB’s VIEW

Headline inflation is expected to remain moderate in the near term as low base effect fades. Core inflation is also likely to be muted amid continued spare capacity in the economy as economic recovery is still underway. Hence, we expect BNM to maintain OPR at the current level throughout 2021.

Source: Hong Leong Investment Bank Research - 26 Aug 2021