Below expectations – December’s headline inflation grew +0.2% y-o-y (vs Nov’18: +0.2% y-o-y). The meagre growth in headline inflation was due to moderate growths among sub-sectors. The result was marginally below our in house and market forecast. For core inflation (which excludes goods with high price fluctuation), it rose to +0.4% y-o-y (vs Nov’18: +0.5% y-o-y). As for the whole year 2018, inflation soothed to +0.9% y-o-y as compared to +3.7% y-o-y in 2017. The result was slightly below our in-house expectation of +1.1% y-o-y. The moderate CPI expansion in 2018 was due to lower cost of production among sub-sectors mainly Transport component (2018: +1.5% y-o-y vs 2017: +13.2% y-o-y).

Moderating inflation among sub-sectors – Most of sub-sectors showed modest inflation in Dec’18 - Clothing & footwear: -3.2% y-o-y (vs Nov’18: -3.1% y-o-y), Recreation services & culture: -0.2% y-o-y (vs Nov’18: -0.3% y-o-y), Health: -0.4% y-o-y (vs Nov’18: -0.2% y-o-y), Communication: -1.3% y-o-y (vs Nov’18: -1.3% y-o-y), Education: +1.4% y-o-y (vs Nov’18: +1.4% y-o-y) and Miscellaneous goods and services: -2.4% y-o-y (vs Nov’18: -2.6% y-o-y). Likewise, all the sub-components mentioned also grew moderately for the whole year 2018 as we believe due to high base effect from the previous year.

Transport inflation dipped into single digit growth – Dec’18 transport inflation contracted to 2.0% yo-y and 0.4% m-o-m (vs Nov’18: -2.3% y-o-y; +0.1% m-o-m). Meanwhile, Transport inflation eased to single digit growth to 1.5% y-o-y in 2018 as compared to +13.2% y-o-y in 2017. We believe mild transport inflation in 2018 was due to major declines in global oil prices couple with fuel subsidies on domestic petrol price particularly RON95 and Diesel.

Mild growth in Food inflation – Food & Non-Alcoholic beverages which accounted for 29.5% in the total CPI, growing moderately to +0.7% y-o-y in Dec’18 as compared +1.1% y-o-y in Nov’18. Easing food inflation in this month was aided by Rice, bread & other cereals: -0.4% y-o-y (vs Nov’18: -0.3% y-o-y), Fish & seafood: -0.1% y-o-y (vs Nov’18: +0.5% y-o-y), Oils & fats: -0.8% y-o-y (vs Nov’18: -0.7% y-o-y) and Vegetables: -4.4% y-o-y (vs Nov’18: +0.8% y-o-y). However, Meat, Milk & eggs, Fruits and Sugar & jam honey improved during this month. Overall, food inflation in 2018 grew +1.5% y-o-y as compared to +4.0% y-o-y in prior year.

Three states surpassed national CPI – National CPI in Dec’18 grew +0.2% (vs Nov’18: +0.2%). Three states which surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+1.0%), Pulau Pinang (+0.6%) and Negeri Sembilan (+0.4%). Meanwhile, Selangor & Wilayah Persekutuan Putrajaya were on par with the national CPI. We reckon that inflation rates across the states are still manageable amid current resilient economic condition.

Foresee 2.0% inflation rate for 2019 – We opine that 2019 inflation to increase modestly, underpinned by mild inflationary pressure from floating domestic fuel price starting 2Q19 (only limit to selected group of people, i.e. low-and-middle income group) and impact of low base effect arising from the tax holiday period in June’18 to Aug’18. Besides, slower global economic growth coupled with lower crude oil prices would dampen our inflation growth. As such, we revised 2019 headline inflation from +2.5% y-oy to +2.0% y-o-y.

Source: JF Apex Securities Research - 25 Jan 2019