The inflation rate for the month of June moderated to 1.6% YoY, making it the slowest pace since June 2010. It was below market expectation of 1.7%. Prices of every component in the index grew at a slower pace and combined with a higher base rate in 2011, led to an overall more subdued pace. The core inflation, which excludes the food price index, slowed to 1.00% from 1.3%. For 1H12, the average inflation rate grew by 2.0% in comparison to 3.1% in the same period a year ago.
Looking into further details, the food & beverages sub'index of the CPI increased by 2.9% YoY, a slightly slower pace from the previous month's 3.0%. On a month'on'month basis, prices of food & beverages increased by 0.6%. With no reports of food shortages in the region and no festivities in the midst of the year, we do not think that food prices will increase by more than 0.2%, with the increase due to higher demands heading into the Eid celebrations in August. However, there have been worrying reports elsewhere. Even with global food index currently at low levels ('13.7% YoY, lowest level seen since 2009), droughts plaguing the United States have led to very poor corn harvests (up to 40% of the crop according to the US Dept. of Agriculture), which will in turn will largely impact prices of beef and poultry as corn is the main feedstock. This will indirectly impact food importers. But this concern is still premature as even if such crises were to rear its head, it is estimated that the impact would only be seen in 2013 when the impact of the final harvest could be seen. Until then, there is little point in being alarmed.
Moving on the second biggest component of the CPI, the housing, water, electricity & other fuel sub'index eased to 1.5% YoY and compared to the previous month, there was no price changes. We have to now keep a close eye on this index as there is the possibility of water shortages in the state of Selangor and Kuala Lumpur due to demand for treated water outstripping capacity as mentioned by the state's water concessionaire Syabas. We cannot be certain how the issue will be addressed but as it is, we remain on the cautious side as news develops.
The third biggest contributor the CPI, the transportation index, grew at a slower pace of 0.1% YoY from 0.4% previously. Compared to the preceding month, prices fell by 0.3%. We maintain our belief that there will be little change in the prices of fuel as we only assume that any form of subsidy cut on the RON 95 will not happen so close to a general election or even too soon afterwards. As with subsidised forms of oil used in manufacturing and construction, there is little to worry ' what with WTI hovering around the moderate levels of US$90/b and Brent at US$100/b. If anything, the impact will be just a small blip in the inflation index.
Outlook
A low rate of inflation is burden lifted off the shoulders of central Source: Bloomberg, Kenanga Research bankers, allowing monetary authorities to act as needed to boost the economy. Such is the case in the USA and Europe ' with potential further easing of policies and additional stimulus packages to drive economies tethering on the brink of recession.
As with the case for Malaysia, a low inflation rate could indicate a slowing economy. However, figures indicate that the domestic economy is thriving despite the situation in the global arena. This resilience allows Bank Negara Malaysia to retain its Overnight Policy Rate even though many of its peers in neighbouring countries have done otherwise. At this juncture, we are retaining our CPI forecast at 2.4% for the whole for 2012, on the expectation of an inflationary spillover in 2H12 when we expect a global economic rebound, at the very least ' from our Asian compatriots.
Source: Kenanga