OVERVIEW

Inflation moderated considerably in the month of September, dipping to 2.6% following a rise of 3.3% in the previous month. It is in line with consensus’ estimate. This is mainly due to a plunge in the transportation index as a result of a high base effect of the petrol subsidy rationalization pushing up prices in September 2013. Moving forward however, we’re expecting prices to tick up once more due the recent increase in petrol prices in October. This would keep overall inflation for 2014 around the 3.3% level.

- Inflation rate in the month of September fell to 2.6% after seeing a 3.3% increase in the previous month, in line with market polls. This is on account of a high base effect due to a comparison to the inflation rate in September 2013, when petrol prices were increased as part of the subsidy rationalization programme. If one were to look at the month-on-month changes, there was a 0.2% MoM increase in the overall prices of goods and services. The core inflation, which minuses off food & beverage, saw a 2.3% annual increase from, after a 3.3% increase seen in August. However, it was 0.2% MoM higher. From the period of January to September, the CPI rate averaged at 3.3% compared to 1.8% seen in the same period in 2013.

- The prices of food and beverages ticked down slightly, to 3.2% from 3.3% previously whilst the monthly comparison saw a 0.2% MoM rise. There was little demand-pull pressure in the month of September to push prices up. On the supply end, the prices of most basic food items are tightly controlled and subsidy towards farmers gives little need to raise prices.

- On wider view, the global food prices as measured by the United Nation’s Food & Agriculture Organization (FAO) fell by 6.0% YoY and by 2.6% MoM. This brings the index to its lowest value since August 2010. This is due to the fall in sugar and dairy, followed by cereals and oils. However, the prices of meat remained firm.

- The housing, water, electricity, gas and other fuels index inflation remained firm at 3.4% with no monthly changes. We believe that there will be little pressure on this index, at least not until another round of electricity and gas price increase. We do not think that the government will do so in the near future, not so soon after the petrol price increase in October. However, if it were to stick to its option plan of a rate revision every six months, we may be seeing another electricity tariff hike early next year, prior to the implementation of the GST in April 2015.

- The transportation index rose by just 0.5% after posting 5.5% increase in the previous month. As mentioned earlier, this is a result of a high base affecting the index as September 2013 was when the prices of petrol was increased by 20 sen as part of the government’s plan to reduce its budget deficit. The monthly comparison saw a 0.2% MoM fall. We are expecting this index to increase by around 5.0% annually in October following the 20 sen increase in the RON 95 and diesel prices.

- The price of Brent in September ended the month at US$94.7 (-12.6% YoY) and U.S crude settled at US$91.2, (-10.9% YoY). Prices of Brent last settled at US$86.2/barrel and US crude at US$82.7/barrel on the 17th of October 2014. The International Energy Agency recently slashed their 2014 demand forecast to 200k barrels per day (bpd), from its previous forecast, and now expects demand growth of 0.7mil bpd to 92.4mil. It also cut its 2015 forecast 300k bpd and now expects demand growth of 1.1mil bpd to 93.5mil. Oil prices has been pushed lower due to high supplies, thanks to shale oil from the US as well as low demand from China and the Eurozone.

Outlook

- In the short term, we ought to see some demand-pull inflation as consumers and businesses prep up for the year-end festivities. However, due to the recent petrol price increase, spending might be more muted than usual. As we had already imputed the possibility of another petrol price hike in the 4Q14, we are still keeping to our 2014 CPI average of 3.3%. For next year, we are expecting the inflation rate to increase even further as the Goods and Services tax is rolled out nationwide. Alongside the possibility of further subsidy rationalization (electricity tariff, gas prices, a change in the petrol subsidy programme), we are looking at CPI in 2015 to average around 4.0%. As the year is coming to a close, the possibility of another rate hike gets slimmer. We no longer think that BNM will increase the rate past the current 3.25%, as inflation remains cost-push. Other methods will likely be introduced to manage any financial imbalances.