Consumer price inflation of 2.6% YoY in September was lower than the consensus estimate of 2.9% but only just above the house estimate of 2.5%. Compared to the previous two months, inflation was significantly lower due to falling transport costs (down 3.8% YoY) as government-regulated prices for petrol and diesel were cut for the second month in a row. Inflation in the Food & Non-Alcoholic Beverages category, the largest component of the Consumer Price Index (CPI) at nearly a third, continued to increase in September to a 21-month high of 4.3% YoY. Headline inflation in 3Q15 averaged 3.0% YoY, higher than the 2Q15 average of 2.2% and slightly above the long-term norm due to GST cost pass-through effects and a July spike in transport costs. We forecast inflation in 4Q15 to average 2.4% YoY on crude oil prices staying at the current level of US$50 a barrel (Brent). Our 2015 full-year average now stands at 2.0%, which is at the bottom end of our previous forecast range.

• The Consumer Price Index (CPI) was up 2.6% YoY in September (August: 3.1%), more than the consensus estimate of 2.9% YoY but only slightly above the house estimate of 2.5%. Lower transport costs was the main reason for lower inflation than the previous two months, although domestic food prices continued to rise.
• The largest CPI category, Food & Non-Alcoholic Beverages, was at a 21-month high of 4.3% YoY while the second largest category, Housing, Water, Electricity, Gas & Other Fuels, was at a 9-month high of 2.7% YoY.
• Domestic food prices continued to rise even as global food prices remained at near six-year lows due to the sharp depreciation of the ringgit. The Food and Agriculture Organisation (U.N.) Food Price Index in September was down 18.9% YoY and this was not enough to make up for the 25.2% YoY decline in the ringgit against the US dollar during the month.
• · Headline inflation in 3Q15 averaged 3.0% YoY, much higher than the 2Q15 average of 2.2% and the 1H15 average of 1.4%, mainly due to a spike in transport costs in July and residual GST cost pass-through effects.
• The Housing, Water, Electricity, Gas & Other Fuels category saw a 2.7% YoY increase in September, which is the same as in August.
• On a MoM basis, the CPI was down 0.3% YoY in September as lower transport costs made up for higher food and housing-related costs.
• The transport index fell by 3.8% YoY and 2.8% MoM
• as government-regulated fuel prices were adjusted 10 sen lower for RON95 petrol and 15 sen for diesel
• 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.
• Further afield, deflation appears to have returned to the Eurozone and remains entrenched in Singapore and Thailand. U.S. inflation in September was flat from a year ago, down from 0.2% in August.

Outlook

• We expect inflation to average 2.4% YoY in 4Q15, lower than the average of 3.0% in 3Q15 assuming crude oil prices continue to remain low at around the US$50 a barrel (Brent) mark due to oversupply concerns. Going by this, we peg our full-year forecast at 2.0%, the low end of our previous forecast range of 2.0% - 2.5%.
• With little evidence of demand-pull inflation, Bank Negara Malaysia is unlikely to consider cutting its policy rate in the near-term. Apart from the fact that it views the current policy rate as below-neutral and accommodative, the monetary policy committee would not want at this delicate stage for the economy to exacerbate the outflow of capital and further weaken the ringgit.

Source: Kenanga Research - 26 Oct 2015