Below expectations – Malaysia’s headline inflation eased to +1.1% y-o-y in Sept’19 as compared to +1.5% y-o-y in Aug’19. The result is below our in-house and market expectation of +1.7% y-o-y and +1.3% y-o-y respectively. Sept’19 headline inflation was buoyed by higher growths in Miscellaneous goods & services and Education as well as modest growth in Food & non-alcoholic beverages and Alcoholic, beverages & tobacco. Besides, core inflation (which excludes administered and high price fluctuation items), soothing to +1.5% y-o-y in Sept’19 as compared to +2.0% y-o-y in the previous month.

Cost of Transport still deflated – Cost of transport widened its deflation to -2.2% y-o-y in Sept’19 from -2.1% y-o-y in Aug’19 due to higher base. Cost of transport has been deflated for eleven months since Nov’18. Overall, average monthly fuel price in Sept’19 for RON 95 was RM1.66 (vs Aug’19: RM1.73; Sept’18: RM2.20), RON 97 was RM2.10 (vs Aug’19: RM2.09; Sept’18: RM2.65), and Diesel was RM1.74 (vs Aug’19: RM1.82; Sept’18: RM2.18). Overall, we believe cost of transport could normalize starting next year due to introduction of targeted fuel subsidies as Government’s decision to remove the price cap of RON95, which will take into effect in Jan’20. Recently, the Government announced to implement Targeted Fuel Subsidy Scheme for RON 95 petrol which will benefit Bantuan Sara Hidup (BSH) receivers, starting Jan’20 in Peninsular Malaysia. We reckon that cost of transport will be elevated slightly as petrol price will be floated in tandem with market price.

Cost of Food, Alcoholic & tobacco inflation grew at a modest mode – Food inflation in Sept’19 grew +2.2% y-o-y (vs Aug’19: +2.6% y-o-y), buoyed by higher sub-group indexes such as Meat (+2.0% yo-y vs Aug’19: +0.6% y-o-y), Fish & seafood (+1.6% y-o-y vs Aug’19: +0.9% y-o-y), Vegetables (+2.6% y-o-y vs Aug’19: +3.2% y-o-y) and Sugar, jam, honey, choc & confectionary (+0.8% y-o-y vs Aug’19: +0% y-o-y). Meanwhile, Alcoholic, beverages & tobacco posted a little growth to +2.4% y-o-y from +2.5% y-o-y in prior month.

Minor inflation growth for other key CPI components – Other CPI components also registered soft growths such as Housing, water, electricity, gas & other fuel (+1.6% y-o-y vs Aug’19: +1.8% y-o-y), Furnishing, household equipment & routine household maintenance (+2.1% y-o-y vs Aug’19: +3.2% y-oy), Health (+1.3% y-o-y vs Aug’19: +1.4% y-o-y), Recreation services & culture (+0.8% y-o-y vs Aug’19: +2.3% y-o-y) and Restaurants & hotels (+1.4% y-o-y vs Aug’19: +1.7% y-o-y). Nevertheless, Communication turned to deflation to -0.1% y-o-y (vs Aug’19: +2.2% y-o-y) while Clothing & footwear narrowed its deflationary to -0.9% y-o-y from -1.1% y-o-y in Aug’19.

Five states surpassed national CPI – During Sept’19, five states surpassed the national CPI as compared to Aug’19 (four states). National CPI in Sept’19 was 1.1%, slightly lower from the previous month (+1.5%). Among the states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+1.7%), Penang (+1.5%), Selangor & Wilayah Persekutuan Putrajaya (+1.5%), Johor (+1.2%) and Perak (+1.2%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

Another moderate growth expected in Oct’19 inflation – We opine that inflation in Oct’19 was moderate due to lower base in 2018. Besides, we believe that contribution from Transport index will be lower following the capping of retail fuel prices of RON95 and Diesel until end of this year. 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 - 24 Oct 2019