Within market expectations – Malaysia’s headline inflation grew +0.6% y-o-y and +0.2% m-o-m in Oct’18 (vs Sept’18: +0.3% y-o-y; +0.4% m-o-m), mainly underpinned by Food inflation, Housing, water electricity, gas & other fuel index, Restaurants & Hotels index as well as Education index. Oct’18 CPI result was within market expectation but slightly below our in house forecast of +0.9% y-oy. For core inflation (which excludes goods with high price fluctuation), it rose to +0.4% y-o-y (vs Sept’18: +0.3% y-o-y).

Higher Transport index – The Transport inflation grew moderately in Oct’18 to +0.8% y-o-y from +0.3% y-o-y in Sept’18 due to lower base effect of fuel price. Average retail price for Oct’18 was RM2.20 for RON95 (vs Oct’17: RM2.18), RM 2.79 for RON97 (vs Oct’17: RM2.47) and RM2.18 for Diesel (vs Sept’17: RM2.13). Besides, on a monthly basis, the Transport index registered +0.3% m-o-m, on par with the previous month growth.

Food inflation edged higher – Food & Non-Alcoholic beverages which accounted for 29.5% in the total CPI, edging higher to +1.2% y-o-y this month from +0.2% y-o-y last month. Food inflation was buoyed by higher sub-sector index such as Vegetables (+3.0% y-o-y vs Sept’18: -1.2% y-o-y) and Fish & Seafood (+0.8 % y-o-y vs Sept’18: +0.4% y-o-y). Meanwhile, sub-group index such as Sugar, Jam, Honey, Chocolate & Confectionery dropped 2.3% y-o-y this month, followed by indexes for sub-groups and Oils & Fats (-0.8 per cent) and Fruits (-0.4 per cent).

Steady growths for other CPI components – Besides, other key indexes remained high in this month such as Housing, water electricity, gas & other fuel index (+2.13% y-o-y), Restaurants & Hotels index (+1.2% y-o-y) and Education index (+1.1% y-o-y). However, some of the key components experienced decelerating growth in the likes of Alcoholic beverages and tobacco (-0.8% y-o-y vs Sept’18: -0.9% y-o-y), Clothing and footwear (-3.1% y-o-y vs Sept’18: -3.2% y-o-y), Furnishings, household equipment and routine (-0.4% y-o-y vs Sept’18: -0.8% y-o-y), Communication (-1.5% y-o-y vs Sept’18: -1.6% y-o-y) and Miscellaneous goods and services (-2.8% y-o-y vs Sept’18: -3.0% y-o-y).

Four states surpassed national CPI – National CPI in Oct’18 grew +0.6% (vs Sept’18: +0.3%). Four states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+1.3%), Negeri Sembilan (+1.1%), Selangor & Wilayah Persekutuan Putrajaya (+0.8%) and Pulau Pinang (+0.7%). Meanwhile, Johor showed the same rate as the national CPI. We reckon that inflation rates across the states are still manageable amid current resilient economic condition.

Expecting moderate growth in Nov'18 CPI – We opine that inflation will grow moderately in next month due to higher base in Nov’17. We revise our headline inflation for 2018 from +1.5% y-o-y to +1.2% y-o-y following moderate Jan’18-Oct’18 CPI growth of +1.1% y-o-y (vs Jan’17-Oct’17:+3.9% y-o-y). We believe the inflationary pressure from Sales and Service Tax (SST) is still manageable coupled with stabilisation of fuel prices for Diesel and RON95 which will offset the impact of higher global crude oil prices. Hence, we expect BNM to keep its OPR unchanged, currently at 3.25%, for the remaining year of 2018 amid prevailing robust economic growth and manageable inflation.

Source: JF Apex Securities Research - 26 Nov 2018