Within market expectation – Headline inflation remained soft in July’18, which grew +0.9% y-o-y as compared to +0.8% y-o-y in June’18, underpinned by moderate growth in most of the main components except for Transport components. The result was within market expectation however above our in-house expectation. Besides, on a monthly basis, the CPI reading rebounded from negative trajectory to +0.2% mo-m (vs June’18: -1.2% m-o-m) amid flattish components growth. For core inflation, July’8 figure (which excludes goods with high price fluctuation) dwindled to +0.2% y-o-y (vs June’18: +0.1% y-o-y).

Transport index remained high albeit lower headline inflation – The Transport component jumped to +6.7% y-o-y in July’18 (vs June’18: +5.5% y-o-y), due to low base effect in the corresponding period of last year. Average retail price for June’18 was RM2.20 for RON95 (vs July’17: RM1.58), RM 2.57 for RON97 (vs July’17: RM2.21) while RM2.18 for Diesel (vs July’17: RM1.93). However, on a monthly basis, the Transport index remained unchanged from the previous month.

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

• Meat: -1.8% y-o-y (vs June’18: -2.3% y-o-y)

• Sugar, Jam, Honey, Choc & Confectionary: -1.0% y-o-y (vs June’18: -0.5% y-o-y)

• Vegetables: -0.9% y-o-y (vs June’18: -2.6% y-o-y)

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

• Oils & Fats: -0.4% y-o-y (vs June’18: -0.2% y-o-y)

Costs of other CPI components narrowed as well – Other key CPI components also moderated significantly such as Alcoholic beverages and tobacco (-0.9% y-o-y vs June’18: -0.% y-o-y), Furnishings, household equipment and routine household (-0.9% y-o-y vs June’18: -1.0.% y-o-y), Restaurant and hotels (+1.01% y-o-y vs June’18: +1.3% y-o-y), and Miscellaneous goods and services (-3.0% y-o-y vs June’18: - 2.6% y-o-y).

Three states surpassed national CPI – National CPI July’18 was little change to +0.9% (vs June’18: +0.8%). Three states that surpassed the national CPI were Negeri Sembilan (+1.3%), Selangor & Wilayah Persekutuan Putrajaya (+1.2), Wilayah Persekutuan Kuala Lumpur (+1.1%) and Johor (+1.0%). We reckon that inflation rates across the states are still manageable amid current resilient economic condition.

Foresee another moderate growth in Aug'18 CPI – We opine that inflation will remain subdued in Aug’18 following the zero-rated Goods and Services Tax (GST) imposed by the Government which took effect on 1 June 2018. However, we expect it to be normalized upon the implementation of Sales and Services Tax (SST) on 1 September 2018. We maintain our headline inflation for 2018 at +1.5% y-o-y 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 remaining year of 2018 amid prevailing robust economic growth and manageable inflation.

Source: JF Apex Securities Research - 27 Aug 2018