July20’s CPI below our expectations – Headline inflation during July’20 contracted -1.3% y-o-y (vs June’20:-1.9% y-o-y). The result was marginally below our in-house forecast of -0.8% y-o-y but within market forecast. July’20 headline inflation was deteriorated by massive contraction in Transport cost as well as other components such as Clothing, Housing as well as Furnishing components. However, on monthly basis, headline inflation rose +0.7% m-o-m as compared to +1.0% m-o-m previously. As for core inflation, core inflation improved +1.1% y-o-y from +1.2% y-o-y previously.

Deflationary from Transport component remained at double-digit – Transport inflation contracted -10.3% y-o-y in July’20 from -14.3% y-o-y in the prior month. Overall, average monthly domestic fuel prices for July’20 were RM1.69 [RON95] (vs July’19:RM1.66), RM1.99 [RON97] (vs July’19:RM2.07) and RM1.85 [Diesel] (vs July’19:RM1.74). Higher deflationary pressure from transport components in view of contraction in transport’ sub-groups such as Operation of personal transport equipment (-12.4% y-o-y) and Purchase of vehicles (-1.5% y-o-y) which offset growth in Transport services (+3.3% y-o-y).

Food inflation remains steady; moderate growth in Alcoholic & tobacco’s cost – Food inflation improved +1.4% y-o-y (vs June’20: +1.6% y-o-y) buoyed by almost all sub-group foods mainly Vegetables (+2.7% y-o-y vs June’20:+2.1% y-o-y) in view of higher indexes in Tomatoes (24.5% y-o-y), Small onion (24.4% y-o-y) and Big onion (20.2% y-o-y). However, Milk, cheese & eggs (-0.9% y-o-y) coupled with Sugar, jam, honey, chocolate & confectionery (-0.8% y-o-y) showed a marginal contraction. On the same note, cost of Alcoholic & tobacco registered a marginal growth of +0.3% y-o-y during this period compared with +0.2% y-o-y during previous month underpinned by higher cost in Alcoholic beverages (+1.1% y-o-y).

Costs of Clothing, Housing and Furnishing components still contracted – Housing, water, electricity, gas & other fuel remained at same deflationary pressure as previous month, contracting -2.6% y-o-y, in view of fewer cost of Electricity, Gas & Other Fuels (-28.5% y-o-y) due to electricity discount by government. Moreover, Clothing & footwear as well as Furnishing, household equipment & routine household maintenance registered marginal contraction of -0.6% y-o-y and -0.09% respectively (vs June’20: -1.1% y-o-y and -0.2% y-o-y respectively) in view of minor contractions in Clothing (-0.3% y-o-y), Goods & services for routine household maintenance (-0.4% y-o-y), Glassware, tableware & household utensils (-0.3% y-o-y) and Household textiles (-0.2% y-o-y). However, Education (+1.2% y-o-y vs June’20:+0.8% y-o-y) coupled with Recreation services & culture (+0.7% y-o-y vs June’20:+0.6% y-o-y) grew steadily during this period. Meanwhile, Health (+1.1% y-o-y) as well as Communication (+1.6% y-oy) posted same growth as the prior month.

Selangor & Wilayah Persekutuan Putrajaya registered the lowest deflationary pressure amid highest food inflation – Four states recorded lower deflationary pressure from national CPI, led by Selangor & Wilayah Persekutuan Putrajaya (-0.7% y-o-y) and followed by Wilayah Persekutuan Kuala Lumpur (-1.0% y-o-y), Penang (-1.1% y-o-y) and Terengganu (-1.2% y-o-y). Besides, Selangor & Wilayah Persekutuan Putrajaya still led the highest food inflation among the states (+2.3% y-o-y).

Expect deflation to taper off further in 2H20 – We expect deflationary pressure to taper off further as almost all economic and social activities were gradually resumed since RMCO starting June’20. However, amid pandemic outbreak situation to weigh down overall CPI, we retain our CPI forecast for 2020 of -0.5% in view of slower inflation mainly from Transport component and other components. Moreover, we are of the view that the current OPR level will be maintained for the rest of 2H20 at 1.75% as economic activities to gradually recover, with reopening of business activities as well as implementation of fiscal stimulus packages to spur private spending

Source: JF Apex Securities Research - 19 Aug 2020