Below expectation – Sept’20 headline inflation posted the same growth as previous month which contracted -1.4% y-o-y. The result slightly lagged behind our internal forecast and market expectation. During this period, headline inflation was buoyed by Food, Alcoholic as well as Furnishings but heavily offset by contraction in the Transport component. Meanwhile, core headline inflation eased to +1.0% y-o-y in Sept’20 from +1.1% y-o-y in the prior month. As for 9M20, CPI averaged at -1.0% y-o-y as compared to +0.6% y-o-y arising from major contraction in Transport items (-9.9% y-o-y vs 9M19:-3.4% y-o-y).

Deflationary growth in Transport same as previous month – Cost of transport contracted -9.9% yo-y and recorded the same decline as Aug’20, no thanks to decline in Operation of personal transport equipment (-12.8% y-o-y) couple with Purchase of vehicles (-1.4% y-o-y). Average monthly domestic fuel prices during Sept’20 were RM1.68 [RON95] (vs Sept’19:RM2.08), RM1.98 [RON97] (vs Sept’19:RM2.58) and RM1.73 [Diesel] (Sept’19:RM2.18).

Marginal growth in both Food and Alcoholic & tobacco inflation – Cost of food rose +1.4% y-o-y during Sept’20 (vs Aug’20:+1.3% y-o-y) as Food inflation was buoyed by growth in sub-food indexes mainly Vegetables (+5.1% y-o-y vs Aug’20:+5.0% y-o-y), followed by Fruits (+1.8% y-o-y vs Aug’20:+0.7% y-o-y), Oil & fats (+1.7% y-o-y vs Aug’20:+1.5% y-o-y) as well as Fish & seafood (+0.6% y-o-y vs Aug’20:+0.3% y-o-y). Meanwhile, Meat rebounded from a contraction of -0.3% y-o-y in Aug’20 to +1.0% y-o-y during this period. Besides, Alcoholic & tobacco inflation also grew to +0.5% y-o-y as compared to +0.3% y-o-y in previous month following higher cost in Alcoholic beverages (+1.8% y-o-y vs Aug’20:+1.2% y-o-y)

Furnishing items rebound from deflationary; Clothing and Housing remain contracted – Furnishing, household equipment & routine household maintenance rebounded to +0.1% y-o-y in Sept’20 from -0.1% y-o-y in Aug’20 after posting negative growth for four consecutive months. The positive growth in Furnishing component was spurred by growth in Tools & equipment for house & garden (+1.4% y-o-y). Meanwhile, Health (+1.1% y-o-y), Communication (+1.6% y-o-y) as well as Restaurants (+0.1% y-o-y) remain unchanged from the prior month while we witnessed growth in Outpatient services (+2.7% y-o-y), Telephone & telefax services (+1.8% y-o-y) and Expenditure in restaurants & cafés (+1.0% y-o-y). On the other hand, Recreation services & culture (+0.1% y-o-y vs Aug’20:+0.6% y-o-y), Education (+0.7% y-o-y vs Aug’20:+1.1% y-o-y) and Miscellaneous goods & services (+3.1% y-o-y vs Aug’20:+2.7% y-o-y) saw their momentum easing in view of slower growth in Other major durables recreation & culture (-0.6% y-oy), Post-secondary non-tertiary education (-0.2% y-o-y) as well as Insurance and Financial services. However, Clothing & footwear (-0.6% y-o-y vs Aug’20:-0.6% y-o-y) and Housing, water, electricity, gas & other fuel (-3.0% y-o-y vs Aug’20:-3.0% y-o-y) showed contractions in view of slower growth in Footwear (-1.8% y-o-y) and Electricity, gas & other fuels (-28.5% y-o-y).

Selangor & Wilayah Persekutuan Putrajaya widened its deflationary pressure amid highest food cost – Selangor & Wilayah Persekutuan Putrajaya widened its deflationary pressure to -0.8% y-o-y in Sept’20 from prior month of -0.7% y-o-y with the highest food inflation (+2.4% y-o-y) among states. Also, Wilayah Persekutuan Kuala Lumpur registered the same inflation as Selangor & Wilayah Persekutuan Putrajaya during this period (-0.8% y-o-y). Meanwhile, Melaka, Kedah & Perlis, as well as Sabah & Wilayah Persekutuan Labuan recorded highest deflationary pressure of 2.2% y-o-y.

Deflationary pressure for full year 2020 – We expect deflationary pressure to slightly widen in the following month in view of conditional movement control order in specific areas which we believe could halt some economic and social activities. However, we reckon Food inflation will continue to rise as consumers stock up the necessary items arising from the CMCO. Therefore, we revise our deflationary CPI forecast from -0.5% y-o-y to -1.0% y-o-y for 2020 in view of rising concern of COVID-19 cases which could lower down the CPI components mainly Transport component. Nevertheless, we are of the view that the current OPR level will be maintained for the rest of the year at 1.75% as we believe implementation of fiscal stimulus packages could help to spur private spending thus supporting economic growth.

Source: JF Apex Securities Research - 22 Oct 2020