Below expectation – Headline inflation in June’18 marked a value below 1% for the first time within 40 months, easing to +0.8% y-o-y as compared to +1.8% y-o-y in previous month. The moderate June’18 inflation was due to decrease in all main indexes except for Transport index amid zero-rated Goods and Services Tax (GST). The result was marginally below our estimate as well as market expectation. Besides that, on a monthly basis, the CPI reading contracted to -1.2% m-o-m (vs May’18: +0.2% m-o-m) while core inflation (which excludes goods with high price fluctuation), dwindled to +0.1% y-o-y in June’18 (vs May’18: +1.5% y-o-y). For 1H18, headline inflation grew at +1.6% y-o-y (vs 1H17: +4.0% y-o-y).

Higher Transport index albeit lower headline inflation – The Transport component rose for a third consecutive month to +5.5% y-o-y in June’18 as compared to +3.8% y-o-y in May’18 due to higher fuel prices. Average retail price for June’18 were RM2.20 for RON95 (vs June’17: RM2.00), RM 2.58 for RON97 (vs June’17: RM2.27) while RM2.18 for Diesel (vs June’17: RM1.92). However, on a monthly basis, the Transport index contracted 0.8% m-o-m (vs +0.1% m-o-m).

Lower Food prices – Food & Non-Alcoholic beverages which accounted for 29.5% in the CPI weight declined below 1% growth to +0.4% y-o-y in June’18 (vs May’18:+2.2% y-o-y). The lower food inflation was due to slower growth in most of the sub-foods such as;

• Meat: -2.3% y-o-y (vs May’18: +1.0% y-o-y)

• Milk & Eggs: -1.0% y-o-y (vs May’18: +0.9% y-o-y)

• Sugar, Jam, Honey, Choc & Confectionary: -0.5% y-o-y (vs May’18: +1.2% y-o-y)

• Rice, Bread & Other Cereals: +0.5% y-o-y (vs May’18: +1.6% y-o-y)

Other key CPI components edged down as well – Other key CPI components also declined significantly such as Alcoholic beverages and tobacco (-0.7% y-o-y vs May’18: +2.0% y-o-y), Housing, water, electricity, gas & other fuels (+1.5% y-o-y vs vs May’18: +2.1% y-o-y), Furnishings, household equipment and routine household (-0.1% y-o-y vs vs May’18: +1.5% y-o-y), as well as Clothing and footwear (-2.6% y-o-y vs vs May’18: -0.1% y-o-y).

Three states surpassed national CPI – National CPI June’18 soften to +0.8% (vs May’18: +1.8%). Three states that surpassed the national CPI were Negeri Sembilan (+1.1%), Wilayah Persekutuan Kuala Lumpur and Selangor & Wilayah Persekutuan Putrajaya (+0.9 respectively). We reckon that inflation rates across the states are still manageable amid current resilient economic condition.

Softer growth expected in July'18 inflation – We opine that inflation will temporarily soften during the tax holiday (June-Aug) following the zero-rated Goods and Services Tax (GST) imposed by the Government which took effect on 1 June 2018. However, we expect the effect could be normalized after the implementation of Sales and Services Tax (SST) on 1 September 2018. We cut our headline inflation for 2018 to +1.5% y-o-y (from +2.5% previously) following stabilization of fuel prices for Diesel and RON95 which will offset the impact of higher global crude oil prices as well as manageable inflationary pressure upon implementation of SST in September 2018. 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 Jul 2018