Consumer price inflation for April, the first month of the new Goods and Services Tax (GST), surprised the market on the downside. Headline inflation for the month was reported at just 1.8% YoY and 0.9% MoM, well below the median estimate of 2.2% YoY and our house estimate of 2.9%. The variance between the actual numbers and our estimate is likely due to us overestimating the quantum of price hikes. We had expected that businesses would take GST implementation as an opportunity to increase or ‘round-up’ prices. However, inflation data demonstrates otherwise and lends support to the view that enforcement, or rather, the threat of enforcement of anti-profiteering laws and checks by Customs officers has deterred businesses from sneaking in price increases additional to GST charges. Fuel prices, which have been responsible for much of the volatility in the index over the past several months, were unchanged going from March to April. After stripping out other factors affecting inflation, the cost-push effect from GST added just 0.9 percentage points to consumer price inflation in April. This lower-than-expected rate of price increase makes it unlikely that inflation will touch the 3.0% mark in later months as we earlier predicted. Thus, we revise down our full-year inflation forecast by 0.5 percentage points to between 2.0% and 2.5%, which is in line with the Ministry of Finance forecast.

The increase in the Consumer Price Index (CPI) was higher in April at 1.8% YoY compared to 0.9% in March. Although higher inflation was expected, the headline figure significantly undershot estimates. The median estimate was for a 2.2% YoY increase while our estimate was even higher at 2.9%. With fuel prices unchanged going from March to April, the main factor affecting the CPI was GST implementation, which turned out to be much milder on inflation than initially expected by the market.

On a MoM basis, the increase in the CPI was 0.9%, as is the seasonally adjusted MoM rate. Our own analysis, stripping out other factors affecting inflation other than GST implementation also returned an identical MoM rate of price increase. We thus conclude that the cost-push effect of GST amounts to about 0.9 percentage points. This is a tad under the official estimate of a 1.1 percentage point increase in headline inflation senior government officials guided for.

Predictably, the CPI categories that saw the largest MoM increases because of GST implementation were Alcoholic Beverages & Tobacco up 2.2%; Furnishings, Household Equipment & Routine Household Maintenance up 2.2%, Health up 1.9%, Communication up 3.1%, Restaurants & Hotels 1.8% and Miscellaneous goods up 2.5%. Only the low quantum of increase surprised us.

Food & Non-Alcoholic Beverages, the largest single category accounting for 30% of the CPI, increased 3.1% YoY, the highest in 7 months. The MoM change was an

increase of 0.8%, the first month of increasing prices after two consecutive months of MoM declines. GST implementation only had a limited effect on this category because many basic consumer goods, especially fresh food, are GST-free.

Transport costs, which have been responsible for volatility in the index over the past several months, was relatively stable going from March to April because there was no change in petrol and diesel fuel prices. Taxi users however faced a fare hike in late March. The category saw a 4.8% YoY decrease and 0.3% MoM increase during the month after a very volatile 1Q15.

The low rate of price increase going from March to April tells us that the authorities have successfully managed to contain profiteering. We had expected that businesses would take GST implementation as an opportunity to increase or ‘round-up’ prices. However, the data demonstrates otherwise and lends support to the view that enforcement, or rather, the threat of enforcement of anti-profiteering laws and checks by Customs officers has deterred businesses from sneaking in price increases additional to GST charges.

Global food prices as measured by the FAO Food Price Index continued their downwards trend, decreasing 19.2% YoY and 1.2% MoM. Declining food and commodity prices worldwide over the past year has mitigated the effect of imported inflation from the lower ringgit. We do not see imported inflation as a concern this year.

In almost all developed and regional markets, inflation has been on a decreasing trend and to some extent, deflation. Malaysia’s most important trading partners the United States, Eurozone, Singapore and Thailand slipped into negative YoY rates of inflation in 1Q15.

Outlook

For the remaining months of 2015 we expect inflation to trend around the 2.0% YoY mark from a 1Q15 average of 0.7%. The one-off price increase caused by GST implementation has set a new higher base on which YoY calculations are made. Given the relatively low inflationary impact, we adjust our previous full-year inflation forecast range of 2.5% to 3.0% (mid-point: 2.7%) downwards by 0.5 percentage points, bringing us in line with the official Ministry of Finance forecast of 2.0% to 2.5%.

We continue to expect the knock-on effects of GST implementation to be temporary. The price adjustment process from GST implementation should stabilise within the next three to six months.

Fuel price volatility is expected to have an outsize influence on the CPI but slightly less so than in 1Q15. In our view, crude oil prices have more or less stabilised at the US$60 per barrel mark and this would reduce price fluctuations under the managed float system for RON95 petrol and diesel fuel. Brent front-month prices on a daily basis averaged US$66.10 a barrel from May 1 to 22 compared to US$56.94 and US$61.14 a barrel during March and April. As fuel prices for the month are determined by the previous month’s average wholesale price ex-Singapore, we see a high probability of a slight upwards adjustment on June 1.

Although this limited pass-through so far from the GST may pose some relatively modest downside risk to our newly-revised forecast, risks from rising oil prices, combined with resilient GDP growth and further GST pass-through, could increase second-round effects in inflation. Nevertheless we expect BNM to remain vigilant against inflation and reiterate our view that policy rates will remain unchanged through 2015.

Source: Kenanga Research - 25 May 2015