Inflation for the first month of 2014 edged up by 3.4% YoY, as a result of an increase in the electricity tariff alongside higher food prices amidst the New Year season. This is slightly higher than consensus and our own estimate for a 3.3% increase. Compared to the previous month, the CPI rate rose by 0.6% MoM. The core inflation (minus food and beverages) increased by 3.0% YoY (Dec: 2.6%) and 0.4% MoM.

Though the prices of food and beverages rose by a lesser degree of 4.2% YoY compared to 4.5% seen in December, the 0.8% MoM increase is evidence that demand for spending still goes strong in preparation for the Lunar New Year. Similarly, there were also other religious and cultural holidays in the same month, which propped prices. On broader scope, the global food inflation as measured by the United Nation’s Food & Agriculture Organization (FAO) saw a decline of 4.4% YoY due to a drop in majority of the components that made up the index, with the exception of dairy price index as demand for dairy products remained firm.

The housing, water, electricity, gas and other fuels index projected a 3.2% YoY (Dec: 2.4%) increase, and a jump of 0.8% MoM. In addition to an increased usage amidst festivities, especially from the retail and food & beverages sectors, we reckon that it is also in anticipation of the electricity bills which is expected to increase by about 15% on average due to an increase in electricity tariff that was implemented in January. Though most users aren’t expected to be effected directly, the price increase for commercial and industrial users would end up being priced in and paid for by the buyers, which is ultimately the average consumer.

The restaurant and hotels sector generated an increase of 4.2% YoY (Dec: 3.3%) and a 1.1% MoM increase. January was still tourist season, further spurned on by Visit Malaysia 2014 advertising. The tropical weather was also becoming even more favourable amidst this year’s particularly harsh winter in the northern hemisphere. Alongside with the Lunar New Year celebrations looming towards the end of the month, consumers frequented these places more often.

The transportation index increased by 5.3% YoY, from 5.0% previously. However, the 0.3% MoM increase is evidence that the increase in petrol prices towards the end of 2013 has begun to normalize. Though there’s every possibility of another petrol subsidy rationalization some time this year, it is looking less likely due to the current stacking of price increment and expectation of further price increase when the GST is placed into effect in 2015.

On broader view, the price of Brent ended the month at US$106.4 (-7.9% YoY) whilst U.S crude settled at US$97.5, unchanged from the previous year. More recently, prices of crude has been on the upside due to harsh winters and Brent last settled at US$110.5 and US oil at US$103.3.

Outlook

We are projecting that the average CPI could increase above 3.0% this year, by and large the effects of fiscal consolidation, as well as some expectation of demand-pull factors on better economic temperament in the later part of the year improving demand and expenditure. However, there are real worries that all these cost-push inflationary reasons will end up effecting consumer spending on a higher degree than strictly healthy. This is why we feel that BNM would keep the Overnight Policy Rate at 3.00% throughout 2014, the one constant needed amidst piling price increases and pre-GST uncertainties.

Source: Kenanga