Consumer Price Index (CPI) – Aug 2019

Within expectations

Within expectations – Malaysia’s headline inflation in Aug’19 improved slightly to +1.5% y-o-y (vs July’19 +1.4% y-o-y) and is within ours and market forecast of +1.5% y-o-y. On a monthly basis, CPI was little changed at +0.2% m-o-m against +0.1% m-o-m last month. Aug’19 headline inflation was underpinned by growths in most of the sub-sectors except for Clothing & footwear and Transport. Meanwhile, core inflation (which excludes administered and high price fluctuation), recorded the same growth as the previous month at +2.0% y-o-y (vs July’19 +2.0% y-o-y).

Widening deflation for Transport – Cost of transport widened its deflationary pressure to -2.1% y-o-y in Aug’19 from -1.9% y-o-y during July’19 due to a higher base last year. Overall, average monthly fuel price in Aug’19 for RON 95 was RM1.73 (vs July’19: RM1.66; Aug’18: RM2.20), RON 97 was RM2.09 (vs July’19: RM2.07; Aug’18: RM2.65), and Diesel was RM1.82 (vs July’19: RM1.74; Aug’18: RM2.18). Overall, we believe cost of transport could normalize going forward arising from the introduction of targeted fuel subsidies as Government’s decision to remove the price cap of RON95, probably during last quarter of 2019.

Food inflation, alcoholic & tobacco products remained high – Food inflation in Aug’19 grew higher for four consecutive months to +2.6% y-o-y (vs July’19: +2.4% y-o-y) due to higher sub-group indexes such as Meat (+0.6% y-o-y vs July’19: +1.6% y-o-y), Fish & seafood (+0.9% y-o-y vs July’19: +0.4% y-oy), and Milk & Eggs (+3.4% y-o-y vs July’19: +2.6% y-o-y). We expect food inflation will continue to show an uptrend trajectory going forward as most of the food items are imported items amid lower base in 2018. Besides, Alcoholic, beverages & tobacco are also in an upward trajectory for five consecutive months, having inched up to +2.5% y-o-y in Aug’19 as compared to +2.3% y-o-y in July’19.

Soothing inflation for other key CPI components – Other CPI components inflation grew at run-ofthe-mill such as Housing, water, electricity, gas & other fuel (+1.8% y-o-y vs July’19: +1.9% y-o-y), Furnishing, household equipment & routine household maintenance (+3.2% y-o-y vs July’19: +3.3% y-oy), Health (+1.4% y-o-y vs July’19: +1.3% y-o-y), Communication (+2.2% y-o-y vs July’19: +2.1% y-o-y), Recreation services & culture (+2.3% y-o-y vs July’19: +2.4% y-o-y), Education culture (+1.4% y-o-y vs July’19: +1.4% y-o-y) and Restaurants & hotels (+1.7% y-o-y vs July’19: +1.7% y-o-y). Nevertheless, Clothing & footwear maintained its deflation at -1.1% y-o-y in Aug’19 (vs July’19: -1.0% y-o-y).

Four states surpassed national CPI – National CPI in Aug’19 was slightly higher at +1.5% from +1.4% in the prior month. Among the states that surpassed the national CPI are Wilayah Persekutuan Kuala Lumpur (+2.4%), Penang (+2.0%) and Selangor & Wilayah Persekutuan Putrajaya (+1.8%) and Perak (+1.6%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

Higher growth expected in Sept’19 inflation – We opine that inflation in Sept’19 will be slightly higher due to lower based in 2018 as the reintroduction of Sales of Services Tax (SST) imposed by the Government kicked in on 1 Sept’18. To recap, SST covers a lower range of products as compared to Goods and Services Tax (GST) as the Ministry of Finance (MoF) highlighted that SST only cover 38% of the CPI basket of goods as compared to 60% by the GST. However, we believe that contribution from Transport index will be lower following the capping of retail fuel prices of RON95 and Diesel.

Overall, we maintain our headline inflation for 2019 at +0.8% y-o-y. We opine that slower global economic growth coupled with flattish crude oil prices could dampen our inflation growth. Despite aggressive interest rates cuts by the US Federal Reserve (Fed) and other Asian central banks (i.e. Thailand and India), we opine that Bank Negara Malaysia (BNM) is likely to keep its OPR unchanged at 3.0% for the remaining year of 2019 (following rate cut in May’19 of 25 bps) amid lingering tensions between the US and China on trade issues as we believe BNM’s monetary policy stance is still accommodative to current economical atmosphere.

Source: JF Apex Securities Research - 26 Sept 2019