OVERVIEW

Consumer price inflation continued to increase as expected in June, to 2.5% YoY from 2.1% in May. The increase was mostly due to higher transport costs following an upwards adjustment to government-regulated fuel prices and cost pass-through from the April implementation of the Goods and Services Tax (GST). June Headline inflation was between consensus expectations of a 2.4% YoY increase and the house estimate of 2.6%. The two main categories of Food & Non-Alcoholic Beverages and Housing, Water, Electricity, Gas & Other Fuels were up 3.4% and 2.5% YoY respectively. The third largest category, transport, was up 3.0% MoM on higher fuel prices but remains down 1.4% YoY. Inflation was noticeably higher in 2Q15 at 2.1% YoY compared to 0.7% YoY in 1Q15 on the impact of GST and higher fuel prices. Inflation is likely to average higher going into 2H15 but still below the long-run average of 3.0% on expectations for crude oil prices to remain persistently low and for the inflationary impact of GST implementation to ease by year-end. As such we maintain our 2015 inflation forecast of 2.0% to 2.5%.

 

• The Consumer Price Index (CPI) increased at a faster pace in June, the third month since GST implementation and the first month of higher fuel prices after three months of stable prices. Headline inflation during the month was 2.5% YoY compared to 2.1% in May. This was only slightly above the consensus estimate of 2.4% YoY but slightly below the house estimate of 2.6%. Much of the increase is attributable to higher transport costs.
• Transport costs, which makes up 14.9% of the CPI, increased 3.0% MoM in June as government-regulated prices for petrol and diesel where increased by 10 sen per litre. Prior to that the price of fuel was kept unchanged for three months from March to May. The higher cost of fuel narrowed the difference in transport costs between corresponding months with June down by just 1.4% YoY (May: -4.7%).
• Food & Non-Alcoholic Beverages, which makes up 30.3% of the CPI, was up 3.4% YoY (May: 3.5%) while Housing, Water, Electricity, Gas & Other Fuels, which makes up 22.6% of the CPI, was up 2.5% (May: 2.6%).
• Comparing consecutive months, the increase in the CPI was 0.6% MoM in May. The seasonally adjusted MoM change was also reported at 0.6%.
• Inflation was noticeably higher in 2Q15 at 2.1% YoY compared to 0.7% YoY in 1Q15 on the impact of GST and higher fuel prices. Between the two factors, GST implementation played a bigger inflationary role.
• The cost-push effect of GST is estimated at about 1.2 percentage points of headline inflation in June, milder than we earlier expected. Transport costs, which increased significantly for the first time since GST implementation, had an approximate contribution of 0.4 percentage points to June headline inflation according to our calculations.
• We understand from the data that the authorities continue to have success in holding back opportunistic price increases through enforcement of anti-profiteering laws and checks by Customs officers.
• The FAO Food Price Index continued to fall in May. The measure of global food prices is now down 21.0% YoY to levels last seen in September 2009. 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 for the local economy at this point in time.
• Deflation is lifting in most of the world’s major economies. Among Malaysia’s most important trading partners, the United States and Eurozone are back to posting positive inflation numbers while Singapore and Thailand is still seeing mild deflation.

Outlook