Substantially above market expectation but below ours – Malaysia’s headline inflation during Oct’19 registered the same growth as the previous month, +1.1% y-o-y (vs Sept’19: +1.1% y-o-y). The figure is substantially above market expectation of +1.0% y-o-y but below our in-house forecast of +1.3% y-o-y. Most of the sub-sectors showed an easing growth during this period. However, headline inflation was underpinned by mild growth in Health, Communication and Education. As for 10M19, the headline inflation is +0.6% y-o-y as compared to 1.1% y-o-y in the corresponding period of last year. Moreover, core inflation (which excludes administered and high price fluctuation items) soothed again to +1.4% y-o-y in Oct’19 as compared to +1.5% y-o-y in Sept’19.

Cost of Transport hit one-year deflation – Cost of transport widened its deflation to -2.3% y-o-y in Oct’19 from -2.2% y-o-y in Sept’19, again, due to high base effect. Cost of transport has been deflated for one-year since Nov’18. Overall, average monthly fuel price for Oct’19 for RON 95 was RM1.66 (vs Sept’19: RM1.66; Oct’18: RM2.20), RON 97 was RM2.11 (vs Sept’19: RM2.10; Oct’18: RM2.79), and Diesel was RM1.74 (vs Sept’19: RM1.74; Oct’18: RM2.18). For the remaining two months of this year, we expect cost of transport will remain deflated due to high base effect and delay in introduction of targeted fuel subsidy scheme which now starts in January next year. However, we believe cost of transport could normalise after implementation of targeted fuel subsidies as Government’s decision to remove the price cap of RON95 and return to a price float mechanism.

Lower Food price as well as Alcoholic & tobacco – Food inflation has trended lower for the three consecutive months, growing +1.8% y-o-y in Oct’19 as compared to +2.2% y-o-y in Sept’19. Slower food price was due to lower sub-food indexes growth such as Meat (-0.2% y-o-y vs Sept’19: +2.0% y-o-y), Oils & fats (-0.2% y-o-y vs Sept’19: +2.0% y-o-y), Vegetables (+0.8% y-o-y vs Sept’19: +2.6% y-o-y), and Food away from home (+2.9% y-o-y vs Sept’19: +3.2% y-o-y). Meanwhile, Alcoholic, beverages & tobacco also posted a minor growth of +2.2% y-o-y from +2.4% y-o-y in the last month.

Other key CPI components grew moderately except for Health, Communication and Education

• Health, Communication and Education showed a higher inflation growth during Oct’19 which grew +1.4% y-o-y, +1.5% y-o-y and +1.9% y-o-y respectively (vs Sept’19: +1.3% y-o-y, -0.1% y-o-y and +1.9% y-oy). Moreover, Housing, water, electricity, gas & other fuel registered the same growth as in previous month which was +1.6% y-o-y. However, other CPI components such as Clothing & footwear (-1.3% y-o-y vs Sept’19: -0.9% y-o-y), Furnishing, household equipment & routine household maintenance (+1.7 y-o-y vs Sept’19: +2.1% y-o-y), Recreation services & culture (+0.7 y-o-y vs Sept’19: +0.8% y-o-y), Restaurants & hotels (+1.2 y-o-y vs Sept’19: +1.4% y-o-y) and Miscellaneous goods & services (+2.2 y-o-y vs Sept’19: +2.7% y-o-y) moderated which led to minor growth in headline inflation.

Three states surpassed national CPI – Only three states surpassed the national CPI during Oct’19 as compared to Sept’19 (five states). National CPI for Oct’19 was 1.1%, same with the previous month of National CPI. Among the states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+1.3%), Penang (+1.3%) and Selangor & Wilayah Persekutuan Putrajaya (+1.2%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition.

Nov’19 headline inflation to pick up slightly – We opine that headline inflation in Nov’19 will slightly pick up due to low base effect. 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. On the other hand, we opine that Bank Negara Malaysia (BNM) is likely cut the OPR by another 25bps in 2020 following greater global economic downside risks and weakening domestic growth.

Source: JF Apex Securities Research - 21 Nov 2019