Exceeding our expectation but slightly below street estimates – Headline inflation for the first month of 2020 exceeded our in-house projection of +1.4% y-o-y, growing +1.6% y-o-y as compared to +1.0% y-o-y during Dec’19. Nevertheless, the result was slightly lower than market forecast of +1.7% y-oy. Jan’20 headline inflation was buoyed by higher inflation growth in Transport, Recreation services & culture as well as Miscellaneous goods & services. As for core inflation (which excludes administered and high price fluctuation items), it surged to +1.7% y-o-y Jan’20 as compared to +1.4% y-o-y in the prior month.

Surge in Costs of Transport – Cost of transport rebounded from contraction to +3.9% y-o-y in Jan’20 (vs Dec’19: -1.9% y-o-y) after posting massive losses for more than one year since Nov’18. The higher transport inflation was due to low base effect. Overall, average monthly fuel price for Jan’20 for RON 95 was RM2.08 (vs Jan’19: RM1.98), RON 97 was RM2.28 (vs Jan’19: RM2.18) and Diesel was RM2.18 (vs Jan’19: RM2.12). We believe the higher inflationary pressure from Transport could prolong throughout the year after the 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 was initially scheduled in Jan’20, we expect the government to resume the programme in 1Q20.

Food inflation, Alcoholic & tobacco abated – Food inflation eased to +0.9% y-o-y in Jan’20 from +1.7% y-o-y in view of less severe impacts from sub-foods item such as Meat (-4.5% y-o-y vs Dec’19: - 3.0% y-o-y), Milk & eggs (-2.7% y-o-y vs Dec’19: -1.5% y-o-y), Fish & seafood (+1.2% y-o-y vs Dec’19: +2.5% y-o-y), Fruits (+0.7% y-o-y vs Dec’19: +1.4% y-o-y), Sugar, jam, honey, choc & confectionary (+0.1% y-o-y vs Dec’19: +0.4% y-o-y) and Food away from home (+1.7% y-o-y vs Dec’19: +2.5% y-o-y). However, Rice, bread & other cereals (+0.7% y-o-y vs Dec’19: +0.6% y-o-y), Vegetables cereals (+5.7% y-o-y vs Dec’19: +5.7% y-o-y) and Food products n.e.c. (+1.8% y-o-y vs Dec’19: +1.8% y-o-y) were increased during this period. For Alcoholic, beverages & tobacco, growth was little change, +0.1% y-o-y in Jan’20 from +0.2% y-o-y in Dec’19.

Higher inflation growth from Recreation services & culture as well as Miscellaneous goods & services – Recreation services & culture and Miscellaneous goods & services grew +0.9% y-o-y and 1.1% y-o-y respectively from +0.6% y-o-y and +1.1% y-o-y respectively during Dec’19. Meanwhile, some subsectors growths were unchanged from the prior month such as Housing, water, electricity, gas & other fuel (+1.7% y-o-y), Health (+1.4% y-o-y), Communication (+1.5% y-o-y), Education (+1.7% y-o-y) and Restaurants & hotels (+1.1% y-o-y). Nevertheless, Clothing & footwear depleted to -1.2% y-o-y (vs Dec’19:-1.0% y-o-y) while Furnishing, household equipment & routine household maintenance eased to +1.2% y-o-y (vs Dec’19:+1.4% y-o-y).

Three states surpassed national CPI; five states exceeded national food inflation – Three states surpassed the national CPI for the month of Jan’20 which is Selangor & Wilayah Persekutuan Putrajaya (+2.1%), Wilayah Persekutuan Kuala Lumpur (+1.8%) and Johor (+1.8%). Nevertheless, five states showed higher food inflation as compared to national food inflation (+0.9%) such as is Selangor & Wilayah Persekutuan Putrajaya (+1.4%), %), Johor (+1.3%), Penang (+1.1%), Wilayah Persekutuan Kuala Lumpur (+1.0%) and Perak (+1.0%).

Expect higher inflation for Feb’20 – We foresee inflation in Feb’20 to pick up slightly in view of higher Transport inflation and low base effect. Overall, we expect inflation to grow at +1.8% y-o-y in 2020 following implementation of Targeted Fuel Subsidy Scheme in Peninsular Malaysia and RON95 petrol price which will be floated in tandem with market prices in which we believe will take effect from 1Q20 onwards. After Bank Negara Malaysia (BNM) surprised the market by announcing an OPR cut of 25bps to 2.75% from current 3.0% during Jan’20 meeting, we expect another OPR cut for 1H2020 amid greater global economic downside risks and weakening domestic demand growth coupled with prevailing Wuhan virus outbreak

Source: JF Apex Securities Research - 24 Feb 2020