Core Inflation Rose for the Second Consecutive Month

The country’s headline inflation rose for the second consecutive month to 0.6% yoy in October, from 0.3% in September, but in line with market expectations. Higher inflation was due mainly to the rising cost of food and non-alcoholic beverages, which rose from 0.5% yoy in September to 1.2% in October, as reflected by higher cost of food away from home (2.7% yoy in October vs. 2.6% in September). Cost of transport climbed by 0.8% yoy in October (0.3% in September) due to higher fuel and lubricating personal transport equipment costs. Cost of restaurants and hotels also rose slightly by 1.2% yoy in October, vs. 1.1% in September. However, components that continued to register negative growth included prices of alcoholic beverages and tobacco (-0.8%), clothing and footwear (-3.1%), furnishing and household equipment (-0.3%), health (-0.2%), communications (-1.5%), and recreation services and culture (-0.2%). Similarly, the underlying core inflation, which excludes administered and volatile price items, also increased slightly for the second consecutive month to 0.4% yoy in October from 0.3% in September. On a mom basis, headline inflation improved from 0.4% yoy in September to 0.2% in October.

On a cumulative basis, the headline inflation rate rose by 1.1% yoy in 10M18, significantly below the 3.9% yoy in 10M17. While the country’s headline inflation will likely increase further from October onwards, we expect the full-year inflation to average around 1.2-1.3% in 2018 (3.7% in 2017). The impact on inflation from the reinstatement of the sales-andservices tax (SST) from September 2018 was low, as goods prices remained mostly unchanged, due partly to the high base in the corresponding period of last year. We expect some improvement in cost of transport from the recent dip in global oil prices, where both Brent and WTI averaged USD68.82 per barrel and USD59.02 per barrel, respectively between 1-22 November 2018 (USD82.15/barrel and USD72.29/barrel, respectively, for the same period in October). However, heading into 2019, there will likely be some upward inflationary pressure from the recently announced new targeted subsidy system for RON95 fuel, which is expected to be implemented in 2H19, as well as the sustained effects of the SST reintroduction. We expect inflation to average around 2.0-2.5% in 2019. Nevertheless, we believe that the BNM will continue to maintain its Overnight Policy Rate (OPR) at 3.25%.

Source: Affin Hwang Research - 26 Nov 2018