Inflation in June increased by 3.3%, in line with market consensus. This is largely due to an increase in the food & beverage index leading up to the month of Ramadhan. Overall inflation will be slightly elevated due to the festivities though will be mostly contained due to price controls. We reckon that CPI will average at 3.3% this year. Seeing as to how BNM has already opted to increase the OPR, we doubt there will be another hike as the consequences may be too steep and any positive gain in rebalancing the financial imbalances becomes a moot point.
- Inflation inched higher in June, recording a 3.3% YoY growth following a 3.2% rise in the previous month. This is in line with market expectations. The higher rate is largely on account of higher food prices. The core inflation (minus food and beverages) also ticked up slightly to 3.2% YoY, from 3.1% previously though the monthly comparison did not see any increase. For the first six months of the year, the CPI averaged at 3.4%, compared to 1.6% seen in the same period in 2013. On a monthly comparison, inflation rose by 0.2% MoM.
- The prices of food and beverages increased by 3.5%, compared to 3.3% previously. On a monthly comparison, it rose by 0.5% MoM, the highest monthly rise since January this year, likely due to a demand-pull run up to the month of Ramadhan. However, increases are expected to remain limited as strict price controls are implemented. There may also be some pressures due to the El Nino bringing about a round of hot and dry weather affecting harvest and supply of agricultural produce. We expect a similar situation in the following month as people get closer to the Eid celebrations.
- On broader view, the global food inflation as measured by the United Nation’s Food & Agriculture Organization (FAO) fell by 1.8% MoM, due to a drop in cereal and vegetable oil prices on increase global supply. An annual comparison saw a 2.8% YoY decline in overall prices.
- The housing, water, electricity, gas and other fuels index inflation rose by 3.2% YoY, a slight uptick compared to 3.1% in May. On a monthly comparison however, this index rose by just 0.1% MoM, which goes to show that price increases due to the electricity tariff and gas price rise earlier of the year has begun to normalize. We do not expect it will settle back to its long-term average of 1.6% YoY if the Government decides to stick to its electricity tariff adjustments every six months.
- The transportation index rose at the same pace as previously, by 5.5% YoY though it fell by 0.4% MoM, indicative that prices have normalized since the petrol price hike at the end of 2013. Due to strong economic performance for the 1Q14, there is a distinct possibility that we could very well see another subsidy rationalization by the 4Q14. However, we feel that the timing of another price hike is far from ideal as inflation still remains higher than the long-term average and consumers will now be burdened by potentially higher interest rates, slicing into their disposable income even further. In addition to that, there will also be another round of penny pinching once the GST is implemented in April 2014, diminishing purchasing power even further.
- On broader view, the price of Brent in June ended the month at US$112.4 (+10.0% YoY) whilst U.S crude settled at US$105.4, (+9.1% YoY). Prices of crude have come off as supply fears have begun to fade. U.S. crude last settled at US$100.4/barrel and Brent at US$106.1/barrel on the 16th of June 2014. Though it has taken a breather, geopolitical risks in the Middle East would continue to exert pressure on crude oil and gas prices due to fears of supply disruption.
Outlook
- In the short term, there is the usual pressure from the food and beverages index surrounding the Ramadhan and Eid festivities, though this is will be momentary as stringent controls keep unwarranted price escalation at bay. We estimate that overall inflation rate would be around 3.3% this year. Seeing as to how BNM had opted to increase the OPR by 25 basis points, we doubt there’ll be another rise even though historical trend says otherwise, as this would adversely affect consumer spending and any gain in dealing with financial imbalances becomes a moot point. That’s not to say that we have completely written off the possibility of another rate hike, just a smaller probability at this stage.
Source: Kenanga