The inflation rate for the month of May increased by 1.8% YoY, from 1.7% previously, slightly higher than market expectations of 1.7% but spot on with our own estimates.  The increase in the overall price index was by and large the result of a rise in food & non-alcoholic beverage and the housing, water, electricity & other fuels index.  On a monthly comparison, the inflation rate increased by 0.3% and rose by an average of 1.6% for the first five months of the year, compared to 2.1% in the same period a year ago. 

The prices of food have been on the rise since the tail end of last year, and rose by 3.5% in the month of May (April:  3.8%). Compared to the previous month, it raised by 0.4% MoM, highest monthly rise since January. In the near term however, it can be said that many will have started preparations for the month of Ramadhan and the following Eid festivities. Similarly, global food inflation, as measured by the United Nation’s Food & Agriculture Organization (FAO) edged up by 5.1% YoY, which is the highest annual increase since October 2011. However, this is the result of a low base effect, as the monthly comparison saw a 0.3% MoM decline, the result of falling prices of dairy and sugar. 

The housing, water, electricity & other fuels sub-index (2^nd biggest weightage) also increased in May, by 2.0% (April: 1.3%), the steepest increased in October 2011. Compared month-on-month, the price level increased by 1.0%, biggest increase since the index was re-based for 2005. 

The transportation index increased by 0.4% YoY (April: 0.6%) and fell by 0.1% MoM. We will be keeping a keen eye on this index in the later part of the year, on the expectation that the government will resume subsidy rationalization on petrol prices. In the near term however, non-subsidized oil prices has been decreasing, as seen with the RON 97 price decreasing by 20 sen to RM2.70 per liter in May. On broader view, the prices of U.S. crude ended at US$92/barrel and Brent crude at US$100/barrel. 

Meanwhile, the annual growth in core inflation (minus food) edged higher by 1.1% from 0.8% in the previous month. Compared to the previous month, it increased by 0.2%. This is largely due to an increase of health, restaurants & hotels, and education indices. 

Outlook

Our general outlook on inflation is that it will move in tandem with economic growth. We foresee that the economy can only go up from hereon and improve further in the second half  of the year, which entails a higher average CPI growth. However, given that the 1H13 growth is looking to turn out more tepid than not, a rebound in the later part of the year would be somewhat mitigated. Our CPI growth forecast for the 2H13 is 2.6% higher than an estimated gain of 1.6% in 1H13, bringing about an average increase on 2.1% for the whole of 2013. Though slightly higher than last year’s average of 1.6% and largely the result of cost-push factor (and the possibility of subsidy cuts), it is still well within manageable levels, given no inflationary (or lack thereof) reason to compel Bank Negara Malaysia to change its current monetary stance. As such, we foresee the Overnight Policy Rate remaining at the 3.00% level for the whole of 2013.