Headline inflation increased to +3.4% YoY in Jun (May: +2.8% YoY), exceeding the consensus estimate of +3.2% YoY. Inflation was mostly driven by higher food prices, followed by transport and restaurants & hotels. Meanwhile, core inflation rate picked up to +3.0% YoY (May: +2.4% YoY).

DATA HIGHLIGHTS

Headline inflation picked up to +3.4% YoY in Jun (May: +2.8% YoY), exceeding the consensus estimate of +3.2% YoY. On a MoM basis, CPI increased at a steady pace (+0.6%; May: +0.6%), driven by rise in food & beverages (+1.2%; May: +0.9%), transport (+1.3%; May: +1.1%), restaurants & hotels (+1.3%; May: +0.6%) and recreation services & culture (+0.4%; May: +0.3%).

On a YoY basis, most index groups ticked upwards. CPI was mainly driven by food & non-alcoholic beverages (+6.1% YoY; May: +5.2% YoY) and transport (+5.4% YoY; May: +3.9% YoY). Restaurants & hotels (+5.0% YoY; May: +3.7% YoY), furnishings, household equipment & maintenance (+3.4% YoY; May: +2.9% YoY), and recreation services & culture (+2.2% YoY; +1.8% YoY) also increased. Meanwhile, housing, utilities & other fuels growth was steady at +1.2% YoY (May: +1.2% YoY).

The transport index accelerated (+5.4% YoY; May: +3.9% YoY) following the rise in RON 97 prices (+80.9% YoY; May: +63.4% YoY). The index also picked up on a MoM basis (+1.3%; May: +1.1%), in line with the higher average Brent oil price during the month (USD117.5/brl; May: USD112.0/brl).

Food inflation continued to surge (+6.3% YoY; May: +5.3% YoY) amid the rise in ‘food away from home’ (+6.6% YoY; May: +5.1% YoY) and ‘food at home’ (+6.1% YoY; May: +5.5% YoY). Meat prices spiked further (+11.9% YoY; May: +9.5% YoY), largely due to the rise in chicken and pork prices contributed by high animal feed costs. Stronger growth for rice, bread & other cereals (+4.2% YoY; May: +3.4% YoY) and fruits (+3.5% YoY; May: +2.8% YoY) also pushed food inflation higher. Meanwhile, prices for vegetables (+8.0% YoY; May: +8.1% YoY), milk, cheese & eggs (+7.9% YoY; May: +8.0% YoY) and oils & fats (+3.3% YoY; May: +3.7% YoY) have moderated, while fish & seafood was steady (+4.3% YoY; May: +4.3% YoY). On the global front, food inflation eased slightly (+23.1% YoY; May: +23.3% YoY) amid moderate growth across meat, cereals and sugar prices.

Services inflation picked up (+2.9% YoY; May: +2.3% YoY), mostly driven by restaurants & hotels (+5.0% YoY; May: +3.7% YoY) due to second-round effects from food inflation as well as rebound in tourism activity. Following this, recreation services & culture also recorded an increase (+2.2% YoY; May: +1.8% YoY).

Core inflation (DOSM) rose (+3.0% YoY; May: +2.4% YoY) following growth across all index groups. Notable price increases stemmed from food & non-alcoholic beverages (+5.6% YoY; May: +4.4% YoY), transport (+5.2% YoY; May: +4.7% YoY), restaurants & hotels (+5.0% YoY; May: +3.7% YoY) and furnishings, household equipment & maintenance (+3.4% YoY; May: +2.9% YoY).

HLIB’s VIEW

In the near term, we expect CPI to go above 4% due to high food prices and low base effects. In addition, there remains upside risk to domestic inflation should government implement targeted fuel subsidy in the remaining months of the year, which is currently under testing. For now we maintain our CPI projection at 3.2% and expect BNM to increase the OPR by 25bps in September MPC meeting.

Source: Hong Leong Investment Bank Research - 25 Jul 2022