As anticipated, consumer price inflation continued to rise in May, the second month of the new Goods and Services Tax (GST), on further pass-through of GST-related costs. Headline inflation of 2.1% YoY in May exactly matched both consensus and house estimates, and was higher than the previous month’s 1.8% and the 1Q15 average of 0.7%. The two main categories of Food & Non-Alcoholic Beverages and Housing, Water, Electricity, Gas & Other Fuels, up 3.5% and 2.6% YoY respectively, contributed the most to the increase in the Consumer Price Index (CPI). Transport costs were stable compared to the previous month but on a YoY basis was 4.7% lower. Strict enforcement of anti-profiteering laws and checks by Customs managed to keep a lid on opportunistic price increases in the first month of GST but expect to see further cost pass-through in the coming months as prices have not yet fully adjusted to reflect GST costs. We however expect consumer price inflation this year to remain low and under the long-run average of 3.0% given that GST implementation has had a milder-than-expected effect on the pace of price increases. We maintain our 2015 inflation forecast of 2.0% to 2.5%, which was revised down 0.5 percentage point last month.

Source: Kenanga Research - 22 Jun 2015