The Consumer Price Index (CPI) rose in July at the fastest rate in 11 months on higher transport and food costs and the lingering effects of GST implementation. Headline inflation was reported at 3.3% YoY, above the consensus median of 2.9% and our estimate of 3.1%. A 10 sen increase in the government-regulated price of the most commonly used fuel led to transport costs that were 3.1% MoM and 1.6% YoY higher. Festive spending drove up food prices. The Food & Non-Alcoholic Beverages category, which has the largest share of the CPI at nearly a third, was up 3.8% YoY, a 16-month high. Inflation is expected to trend in the range of 2.5% - 3.0% for the remainder of the year assuming crude oil prices continue to remain low on oversupply concerns. Going by this, we see the full-year average as hitting the lower end of our forecast of 2.0% - 2.5%.

• The Consumer Price Index (CPI) increased at a faster pace of 3.3% YoY in July compared to 2.5% in June. July was the fourth month since GST implementation on April 1 and the second consecutive month of higher fuel prices, both of which added to inflation. There was also seasonal inflationary pressure, mainly on food prices. The MoM increase in the CPI was 0.8%.
• Headline inflation was significantly higher than the consensus median of 2.9% YoY and the house estimate of 3.1% but this was not surprising given the high volatility in the CPI from fluctuating fuel prices and seasonal effects.
• Most of the increase in the CPI between June and July was due to higher transport costs, which became a volatile item with a large influence on headline outcomes after last December’s switch to a managed float pricing system for the most popular grades of fuel; RON95 petrol and diesel. The Transport category was up 3.1% MoM in July, contributing 0.5 ppt to headline inflation. On a YoY basis the category was up 1.6%.
• The Food & Non-Alcoholic Beverages category saw an increase of 3.8% YoY in July (June: 3.4%), the highest since March last year due to the annual Eid al-Fitr religious celebration taking place during the month. The influence of food prices on inflation is significant as it has a close to one-third share of the CPI.
• Global food prices continued to trend lower and are now approaching a six-year low. The FAO Food Price Index was down 19.4% YoY in July.
• GST implementation on April 1 caused inflation to jump from an average of 0.7% YoY in 1Q15 to 2.2% in 2Q15. The increase in prices from GST implementation is a one-off event but would result in elevated inflation for between six months to a year. At least 1.2 ppts of headline inflation in July can be attributed to the cost-push effect of GST.
• Deflation has lifted in most of the world’s major economies. Among Malaysia’s most important trading partners, the United States and Eurozone are posting positive inflation numbers while Singapore and Thailand is still seeing mild deflation.

Outlook

• We expect inflation to trend in the range of 2.5% - 3.0% in the remaining five months of the year assuming crude oil prices continue to remain low on oversupply concerns. Going by this, we see the full-year average as hitting the lower end of our forecast of 2.0% - 2.5%.
• The recent depreciation in the ringgit of 14.4% year to date against the US dollar, beyond that of major trading partners, increases the risk of imported inflation but this will be limited by global deflationary pressure.
• The Brent crude oil benchmark weakened to below US$50 a barrel in August on continued oversupply concerns. Compared to the July average of US$56.76 a barrel, the August average to date of US$49.18 is far lower and hints at a cut in government-regulated fuel prices for September.
• GDP growth, although slowing, performed better than expected in 2Q15 and this should motivate Bank Negara Malaysia to hold steady on policy rates through 2015.

Source: Kenanga Research - 20 Aug 2015