Below expectations – Consumer Price Index (CPI) eased to +1.3% y-o-y in Mar’18 as compared to +1.4% in Feb’18, underpinned by slow growths in most of the main components. The result is below our in-house and consensus expectations of +1.8% and +1.6% respectively. Besides, on a monthly basis, the CPI reading contracted by 0.3%, due to dismal m-o-m growth in its key components. For core inflation which excludes goods with high price fluctuation, slightly dropped to +1.7% y-o-y in Mar’18 from +1.8% yo-y in Feb’18. As such, CPI for first half of 2018 soothed at +1.8% y-o-y against +4.3% y-o-y in first half of 2017.

Transport index extended its contraction – Transport component in Mar’18 widened its contraction to 1.5% y-o-y after registering its first contraction of 0.3% y-o-y in last month as we believe it was due to high base effect. Meanwhile, on a monthly basis, the Transport index also slid to -1.4% m-o-m (v.s Feb’18: -0.6%). Overall, average monthly fuel price index for Mar’18 stood at RM2.20 for RON95 and RM2.47 for RON97 (vs Feb’18: RM2.26; RM2.53) while RM2.17 for Diesel (vs Jan’18: RM2.24).

Moderate Food inflation – Food & Non-Alcoholic beverages which are the main component in CPI grew moderately by +2.8% y-o-y in Mar’18 as compared to +3.0% y-o-y in previous month. The mild growth in Food inflation was supported by steady growth of food sub group indices which comprise Fish & Seafood: +4.6% y-o-y (vs Feb’18: +5.8%), Meat: +1.6% y-o-y (vs Feb’18: -0.6%) and Fruits: +2.0% y-o-y (vs Feb’18: +2.5%).

Mild growth in key CPI components – Besides, other key CPI components that showed a moderate yearly growths were Recreation, services & culture (+0.5% y-o-y vs Feb’18: +0.4%); Restaurants and Hotels (+2.0% y-o-y vs Feb’18: +1.8%) and Miscellaneous goods & services (+0.4% y-o-y vs Feb’18: +0.3%). Meanwhile, Alcoholic & tobacco, Housing, water, electricity, gas & others fuels and Furnishing, household equipment & routine household maintenance showed flattish yearly growths.

Three states surpassed national CPI – National CPI in Mar’18 was +1.3% (vs Feb’18: +1.4%). Three states that surpassed the national CPI were Selangor & Wilayah Persekutuan Putrajaya (+1.6%), Melaka (+1.5%) and Wilayah Persekutuan Kuala Lumpur (+1.4%). We believe inflation rates across the states still manageable amid current resilient economic condition.

Expecting April’18 inflation to remain soft – We reckon that inflation in Apr’18 to remain tepid as we expect Transport inflation to trend lower, as well as other main components. For full year 2018, we reduce our inflation rate forecast from +3.0% to +2.7% as we believe the stabilization of global crude oil prices would tame the domestic inflation. Besides, appreciation of Ringgit against US Dollar could curtail the retail fuel prices thus reducing transport inflation as well as the import costs of goods. On the other hand, we expect BNM to keep its OPR unchanged, currently at 3.25%, for 2018 amid prevailing robust economic growth and manageable inflation.

Source: JF Apex Securities Research - 19 Apr 2018