Consumer price inflation in August was higher than expected at 3.1% YoY compared to house and consensus estimates of 2.7% and 3.0% respectively. Compared to the previous month, however, inflation was lower. The drop in headline inflation from an 11-month high of 3.3% in July is largely due to lower government-regulated prices for petrol and diesel. Lower transport costs made up for higher food prices. Inflation in the Food & Non-Alcoholic Beverages category, which is the largest component of the Consumer Price Index (CPI) at nearly a third, continued to increase in August to 4.2% YoY, a 19-month high. The second largest category, tracking the cost of housing and utilities, saw a higher than expected 2.7% YoY increase due to higher charges for home repairs. For the remainder of 2015, inflation is expected to trend in the range of 2.5%-3.0% 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) was reported 3.1% YoY higher in August (July: 3.3%), more than house and consensus expectations of 2.7% and 3.0% respectively on continued increases in the two main CPI categories of Food & Non-Alcoholic Beverages and Housing, Water, Electricity, Gas & Other Fuels.
• The Food & Non-Alcoholic Beverages category was up 4.2% YoY, a 19-month high, while the Housing, Water, Electricity, Gas & Other Fuels categories was up 2.7% YoY, an 8-month high. Both categories have considerable influence on the CPI with a combined 52.9% weight.
• Food prices rose in Malaysia even as global food prices continued to trend lower to a more than six-year low. The FAO Food Price Index in August was down 21.5% YoY in line with the 21.7% YoY decline in the ringgit against the USD, meaning imported food did not get any cheaper.
• The Housing, Water, Electricity, Gas & Other Fuels category saw a higher-than-expected 2.7% YoY increase in August due to a 7.1% YoY increase in charges for home repairs. Electricity prices were on average 3.3% lower YoY following the extension of the end-date of a tariff rebate to December from June previously. The rebate was introduced in March this year.
• On a MoM basis, the CPI was unchanged in August as lower transport costs made up for higher food and housing-related costs. The transport index fell 1.2% YoY and 2.7% MoM as government-regulated fuel prices were adjusted 10 sen lower for all grades of fuel
• Cost pass-through from Goods and Services Tax (GST)
• implementation in April appears to have eased but the effect of the one-off increase in prices will continue to be felt until 1Q16, when headline inflation is expected to peak due to a low-base effect from unusually low inflation in 1Q15.
• Urban inflation continues to trend above that of rural inflation. Between late-2013 and 2014, this was due to
• higher prices from a cut in fuel subsidies. In 2015, especially after April, it was because GST targets mainly discretionary spending. The rural CPI places a greater weight on basic goods, most of which are exempted from GST. The urban CPI meanwhile places relatively higher weights on discretionary spending categories.
• Further afield, deflation appears to have lifted in most of the world’s major economies but inflation remains below the long-term average for many countries. In the U.S, a dip in the measure of inflation expectations was one of the reasons for the Federal Reserve deciding to again delay a long-anticipated rate hike.

Outlook

• We expect inflation to trend in the range of 2.5% - 3.0% in the remainder of the year assuming crude oil prices continue to remain low on oversupply concerns. September inflation will fall further from August on another cut to government-regulated prices of 10 sen for petrol and 15 sen for diesel. Going by this, we see the full-year average as hitting the lower end of our forecast of 2.0% - 2.5%.
• With core inflation remains elevated (above 2.0%) and economic activity still holding up, BNM is unlikely to consider cutting its policy rate this year. Apart from the fact that it views the current policy rate as below-neutral and accommodative, it would unlikely want to exacerbate the outflow of capital and further weaken the ringgit which has sharply depreciated by about 19.0% against the US dollar since the beginning of the year.

Source: Kenanga Research - 25 Sep 2015