Dec’19 inflation below ours but within forecast – Dec’19 Malaysia’s headline inflation grew +1.0% yo-y (vs Nov’19: +0.9% y-o-y) which was underpinned by mild growth in sub-sectors. The result was slightly below ours (+1.2% y-o-y) but within market forecast (+1.0% y-o-y). As for core inflation (which excludes administered and high price fluctuation items), it posted the same growth for three consecutive months which was +1.4% y-o-y (vs Nov’19:+1.4% y-o-y).

Full year CPI within our expectation – For full year 2019, the headline inflation grew +0.7% y-o-y as compared to +1.0% y-o-y in 2019, which is in line with our estimate. Moderate inflation for 2019 was due to mild inflation in most of sub-indexes mainly Transport and Clothing & footwear which showed a deflationary pressure.

Costs of Transport deflated during 2019, expected to normalise in 2020 onwards – Cost of transport contracted -1.9% y-o-y during Dec’19 from -2.4% y-o-y during Nov’19. Overall, average monthly fuel price for Dec’19 for RON 95 was RM1.39 (vs Nov’19: RM1.73; Dec’18: RM2.20), RON 97 was RM2.10 (vs Nov’19: RM2.19; Dec’18: RM2.50), and Diesel was RM1.74 (vs Nov’19: RM1.82; Dec’18: RM2.18). For the whole year, transport inflation contracted -3.1% y-o-y as compared to +1.6% y-o-y during prior year. Cost of transport has been deflated since Nov’18 and led to deflationary pressure for the whole year of 2019. We believe cost of transport could normalize after targeted fuel subsidies kick in as Government’s decision to remove the price cap of RON95 and return to a price float mechanism. Despite delay in the implementation of the targeted fuel subsidy programme (PSP) which is initially scheduled to begin in Jan’20, we expect the government to resume the programme in 1Q20, thus, may bring slightly higher inflationary pressure.

Higher food inflation as well as Alcoholic & tobacco during 2019 – Food inflation surged to +1.7% y-o-y (vs Nov’19: +1.5% y-o-y) following higher sub-food indexes such as Fish and seafood (+2.5% y-o-y vs Nov’19: +1.3% y-o-y), Vegetables (+5.7% y-o-y vs Nov’19: +2.0% y-o-y) and Food away from home (+2.5% y-o-y vs Nov’19: +2.2% y-o-y). On the same note, food inflation for 2019 also higher, growing +1.7% y-o-y from +1.5% y-o-y. For Alcoholic, beverages & tobacco, Dec’19 inflation eased to +0.2% y-o-y from +0.4% y-o-y in Nov’19. Meanwhile, 2019 alcoholic, beverages & tobacco inflation rebound to +1.5% y-o-y from deflation (vs 2018: -0.1% y-o-y).

Mild growths in other sub-sectors as well during 2019 – Clothing & footwear (-1.0% y-o-y vs Nov’19: -1.1% y-o-y) contracted during Dec’19. Meanwhile Furnishing, household equipment & routine household maintenance footwear (+1.4% y-o-y vs Nov’19: +1.5% y-o-y), Recreation services & culture (+0.6% y-o-y vs Nov’19: +0.8% y-o-y) and Miscellaneous goods & services (+2.4% y-o-y vs Nov’19: +2.5% y-o-y) slightly eased during this period. However, Education (+1.7% y-o-y vs Nov’19: +1.6% y-o-y) was slightly rose and other sub-sectors such as Restaurants & hotels, Housing, water, electricity, gas & other fuel, Health and communication recorded the same growth as prior month. For full year of 2019, Clothing & footwear contracted -1.6% y-o-y (vs Nov’19: -2.1% y-o-y) while Housing, water, electricity, gas & other fuel, Health and Restaurants & hotels easing in its growth.

Three states surpassed national CPI – Three states surpassed the national CPI for the month of Dec’19. National CPI for Dec’19 was 1.0%, (vs Nov’19: 0.9%). Among the states that surpassed the national CPI were Wilayah Persekutuan Kuala Lumpur (+1.5%), Johor (+1.1%) and Selangor & Wilayah Persekutuan Putrajaya (+1.4%). Overall, we reckon that inflation rates across states are still manageable amid current resilient economic condition

Foresee 1.8% headline inflation for 2020 – For 2020, we expect inflation to grow at +1.8% y-o-y following implementation of Targeted Fuel Subsidy Scheme in Peninsular Malaysia and RON95 petrol price will be floated in tandem with market price which we believe will take effect in 1Q20. Still, we reckon that 2020 inflation is relatively low and manageable as we believe global crude oil prices will stabilize at current level amid prevailing slowing global economy and oversupply condition. On a separate announcement, Bank Negara Malaysia (BNM) surprised the market by announcing an OPR cut of 25bps to 2.75% from current 3.0% in view of greater global economic downside risks and weakening domestic demand growth coupled with prevailing Wuhan virus outbreak.

Source: JF Apex Securities Research - 23 Jan 2020