Below expectations – Consumer Price Index (CPI) recorded a little change of +1.4% y-o-y in Apr’18 as compared to +1.3% in Mar’18, supported by moderate growths shown by most of the main components. The result is below our in-house and consensus expectations of +1.5% and +1.6% respectively. Besides that, on a monthly basis, the CPI reading remained unchanged at 120.9 as compared to last month. For core inflation (which excludes goods with high price fluctuation), it was slightly dropped to +1.5% y-o-y in Apr’18 from +1.7% y-o-y in Mar’18.

Transport index unchanged – Transport component in Apr’18 grew flat to +0.4% y-o-y as compared to +1.5% y-o-y in Mar’18. Meanwhile, on a monthly basis, the Transport index registered an unchanged growth at 117.6 due to no changes in fuel prices. Currently, monthly fuel price stands at RM2.2 for RON95, RM2.47 for RON97 and RM2.18 for Diesel. Following the change in ruling government, weekly pricing mechanism will be abolished as retail fuel price will be pegged at its current level for now. We reckon that contribution from transport index to CPI will be flattish as government would subsidise petrol for targeted group should global crude oil prices increase.

Lower Food inflation – Food & Non-Alcoholic beverages which are the main component in CPI decelerated to -5.6% y-o-y in Apr’18 as compared to +2.8% y-o-y in previous month. The slower growth in Food inflation was dented by dim growth of food sub-group indices such as Fish & Seafood: +4.1% y-o-y (vs Mar’18: +4.6%), Meat: +1.1% y-o-y (vs Mar’18: +1.6%) and Fruits: +1.9% y-o-y (vs Mar’18: +2.0%).

Flattish growth in key CPI components – On a flip side, other key CPI components that showed flattish yearly growths were Housing, water, electricity, gas & other fuels (+2.0% y-o-y vs Mar’18: +2.0%); Health (+2.8% y-o-y vs Mar’18: +2.0%); and Education (+0.08% y-o-y vs Mar’18: +0.08%).

Three states surpassed national CPI – National CPI in Apr’18 was +1.4% (vs Mar’18: +1.3%). Three states that surpassed the national CPI were Selangor & Wilayah Persekutuan Putrajaya (+1.6%), Pulau Pinang (+1.5%) and Wilayah Persekutuan Kuala Lumpur (+1.9%). We reckon that inflation rates across the states still manageable amid current resilient economic condition.

Another soft growth in May’18 inflation – We opine that inflation in May’18 to slightly pick up as the index were affected by food hike during the fasting month and pre-Hari Raya celebration. However, we believe that contribution from Transport index will fade off following change in price mechanism as well as subsidizing from new government as of now. We maintain our headline inflation of +3.0% y-o-y for the whole year of 2018 as we believe the stabilisation of commodity prices and strengthening in Ringgit would tame the domestic inflation. 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 - 24 May 2018