Slightly below expectation – Headline inflation during Feb’20 eased to +1.3% y-o-y from 1.6% y-o-y during Jan’20, moderately below our in-house and market projections. Soothing inflation was due to moderate cost in most sub-components except for Alcoholic beverages and tobacco. As for core inflation (which excludes administered and high price fluctuation items), also moderated to +1.3% y-o-y in Feb’20 as compared to +1.7% y-o-y in the prior month.

Easing costs of Transport – Cost of transport eased to +2.4% y-o-y in Feb’20 after sharp rebound of +3.9% y-o-y during Jan’20. Overall, average monthly fuel price for Feb’20 for RON 95 was RM2.07 (vs Feb’19: RM1.60), RON 97 was RM2.39 (vs Feb’19: RM1.84) and Diesel was RM2.13 (vs Feb’19: RM1.74). Going forward, we expect cost of transport will drop further amid pandemic outbreak and fall in global crude oil prices, which is now trade below US$30 per barrel arising from oversupply condition. In addition, we also believe implementation of the targeted fuel subsidy programme (PSP) initiated by the previous government to be delayed amid movement control order imposed during Covid-19 outbreak.

Food inflation abated; Alcoholic & tobacco rise – Food inflation grew mildly to +0.8% y-o-y in Feb’20 as compared to +0.9% y-o-y during Jan’20 in view of slowing growths in food sub-items such as Meat (- 2.8% y-o-y vs Jan’20: -4.5% y-o-y), Fish & seafood (-0.1% y-o-y vs Jan’20: +1.2% y-o-y), Milk, Cheese & Eggs (-3.8% y-o-y vs Jan’20:-2.7% y-o-y) and Fruits (+0.1% y-o-y vs Jan’20: +0.7% y-o-y). Going forward, we expect food inflation to slightly higher in the following month following higher food consumption by consumer during movement control order (MCO) imposed by government since mid-March due to Covid-19 outbreak. Moreover, despite lower food inflation, Alcoholic & tobacco rose +0.2% y-o-y during this period from +0.1% y-o-y from prior month.

Soothing inflation for other sub-components as well… – Housing, water, electricity, gas & other fuel (+1.5% y-o-y vs Jan’20 +1.7% y-o-y), Health (+1.3% y-o-y vs Jan’20 +1.4% y-o-y), Recreation services & culture (+0.7% y-o-y vs Jan’20 +0.9% y-o-y), as well as Education (+1.3% y-o-y vs Jan’20 +1.6% y-o-y) showed an easing momentum. Meanwhile, Clothing & footwear contracted to -1.1% y-o-y (vs Jan’20: - 1.2% y-o-y). Nevertheless, Communication (+1.5% y-o-y), Restaurants & hotels (+1.1% y-o-y) as well as Miscellaneous goods & services exhibited an unchanged growth as the previous month.

Four states surpassed both national and food inflations – Four states surpassed the national CPI for the month of Feb’20 which are Selangor & Wilayah Persekutuan Putrajaya (+1%), Wilayah Persekutuan Kuala Lumpur (+1.5%), Pahang (+1.5%) and Johor (+1.4%). Meanwhile, among the states that have higher food inflation are Selangor & Wilayah Persekutuan Putrajaya (+1.2%), Johor (+1.3%), Penang (+1.0%) and Perak (+0.9%).

Expect another moderate inflation for Mar’20 – We foresee inflation in Mar’20 to remain low following massive drop in global crude oil prices which lead to lower domestic retail fuel price. Therefore, cost of transport will be low and fail to offset higher food inflation, we believe. Amid pandemic outbreak and Malaysia’s MCO imposed by government, we cut our overall CPI forecast for 2020 to 0.8% from +1.8% y-o-y previously in view of slower inflation mainly from Transport component. Moreover, 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 coupled with emergency rate cuts from other emerging markets, we expect another OPR cut in May’20 amid greater global economic downside risks and weakening domestic demand growth under prevailing Covid-19 virus outbreak.

Source: JF Apex Securities Research - 26 Mar 2020