Below expectation – Consumer Price Index (CPI) remains deflated for two consecutive months, narrowing its decline to -0.4% y-o-y in Feb’19 compared to-0.7% y-o-y in Jan’19. On a monthly basis, headline inflation rebounded to +0.2% m-o-m from -0.5% m-o-m in Jan’19. Meanwhile, core inflation, which excludes administered and high price fluctuation, improved to +0.3% y-o-y from +0.2% y-o-y in Jan’19. Feb’19 headline inflation was slightly behind our in-house and market expectation due to slow moving growth in most of sub-sectors mainly Transport index.

Moderate growth among sub-sectors – Food inflation which makes up 29.5% of the total weight in the CPI basket, grew +1.0% y-o-y which is the same as Jan’19’s growth. Food inflation was supported by mild growth in Meat: +2.1% y-o-y (vs Jan’19: +2.4% y-o-y), Milk & Eggs: +1.8% y-o-y (vs Jan’19: +0.6% y-o-y), and Food away from home: +3.4% y-o-y (vs Jan’19: +3.3% y-o-y). Besides, Alcoholic beverages tobacco (+1.1% y-o-y) and Housing, water, electricity, gas & other fuels (+2.0% y-o-y) also posted unchanged y-o-y growth as the previous month while we also saw higher growth in Furnishing, household equipment & routine household maintenance: +0.1% y-o-y (vs Jan’19: -0.3% y-o-y), Restaurants & hotels: +1.3% y-o-y (vs Jan’19: +1.2% y-o-y) and Education: +1.3% y-o-y (vs Jan’19: +0.9% y-o-y). However, some sub-sectors were diminished and offset the growth of headline inflation in Feb’19 such as Clothing & footwear: -3.2% y-o-y (vs Jan’19: -3.3% y-o-y), Health: -0.4% y-o-y (vs Jan’19: -0.5% y-o-y), Communication: -1.2% y-o-y (vs Jan’19: -1.2% y-o-y) and Miscellaneous goods & services: -2.2% y-o-y (vs Jan’19: -2.4% y-o-y)

Sluggish Transport inflation – Transport inflation which consists of 14.6% of the total weight in the CPI basket contracted sharply to -6.8% y-o-y, narrowing from -7.8% y-o-y in the previous month. On a monthly basis, Transport inflation rebounded to a positive growth of +5.5% y-o-y from -5.5% due to increase in retail fuel price. However, as looked into yearly comparison, average monthly fuel price in Feb’19 for RON 95 was RM1.60 (vs Jan’19: RM2.26), RON 97 was RM 1.84 (vs Jan’19: RM2.53), and Diesel was RM1.74 (Jan’19: RM2.24). We believe headline inflation rate is expected to back to positive territory from next month onwards following higher global oil crude prices.

Two states surpassed national CPI – National CPI in Feb’19 stood at -0.4% (vs Jan’19: -0.7%). Only two states surpassed the national CPI being Wilayah Persekutuan Kuala Lumpur (+0.3%) and Pulau Pinang (+0.2%). Food inflation was higher at Wilayah Persekutuan Kuala Lumpur (+3.7%) and Selangor & Wilayah Persekutuan Putrajaya (+1.3%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

March’19 inflation to pick up from deflation – We foresee inflation in Mar’19 to pick up with positive trajectory as higher domestic fuel prices that could lift Transport inflation. We opine that 2019 inflation will 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 flat crude oil prices would dampen our inflation growth. Overall, we maintain headline inflation forecast for 2019 at +2.0% y-o-y. On the other hand, we expect that BNM could keep its OPR unchanged, currently at 3.25%, for 2019 amid prevailing robust economic growth and manageable inflation.

Source: JF Apex Securities Research - 25 Mar 2019