Below expectation – Consumer Price Index (CPI) edged down to +4.4% y-o-y in Apr’17, as compared to +5.1% in Mar’17. This result was below our expectation and market consensus of +5.4% and +4.5% respectively. The below-than-expected headline inflation was dented by slump in Transport index as well as flat growth in other components. Meanwhile, on a monthly basis, the CPI reading dropped again by 0.3%, due to dismal m-o-m growth in its key components.

Decelerated Transport components - Transport component in Apr’17 dropped to +16.7%, after an enormous growth of +23.0% in Mar’17, induced by low based effect relative to 2016 coupled with decline in retail fuel prices. On m-o-m basis, the fluctuation of weekly fuel prices showed RON95 and RON97 drop by 23 sen and 25 sen respectively while diesel prices fell by 23 sen.

Tepid growth by main components – The weaker-than-expected CPI growth in Apr’17 was affected by softer yearly growth in its main components such as:

• Housing, Water, Electricity, Gas & Other Fuels: +2.2% y-o-y (vs +2.1 y-o-y in March’17)

• Clothing and Footwear: -0.1% y-o-y (vs -0.2 y-o-y in March’17)

• Restaurants and Hotels: +2.4% y-o-y (vs +2.3 y-o-y in March’17)

Flattish growth for Food items and Alcoholic and Tobacco components – Food and Non-Alcoholic beverage components which account for 30.2% of CPI components maintained its growth of +4.1% y-o-y in Apr’17 as compared to previous month of +4.1% y-o-y. However, we opine that the food inflation is likely to rise upon Ramadan, starting on May as the demand for groceries will spike up. Besides that, for Alcoholic and Tobacco, the index maintained its growth of +0.2% y-o-y (on par with Mar’17: +0.2%) for a fourth conservative months as cigarette prices and the excise duties remained unchanged.

Envisage moderate growth in May'17 CPI – We estimate that CPI to grow moderately by +4.5% y-o-y in May’17 underpinned by modest growth in its main components as well as hike in food items due to fasting season. However, we reckon that Transport index will record a flat m-o-m growth next month with drop in petrol and diesel prices in May’17. We maintain our headline inflation of +3.6% y-o-y for the whole year of 2017 (against Jan-April’17 inflation of 4.3% y-o-y), expecting inflation to taper off caused by softening commodity prices and strengthening RM. In conjunction with that, we opine that BNM will keep the OPR unchanged at 3.00% for 2017 with current level of interest rate which is accommodative to the domestic economic growth coupled with the possibility of early election in this year

Source: JF Apex Securities Research - 25 May 2017