OVERVIEW

Consumer price inflation quickened to 1.5% YoY in August from 1.1% in the previous month. The headline inflation came in higher than the consensus and house estimates of 1.3% and 1.2% respectively. The rising inflation was mainly influenced by a low base effect in the transportation sector. In addition, a jump in the Recreation Services & Culture index provided additional support to overall price growth. By category, Transport fall at a slower pace of 6.7% YoY in August (July: -9.9%) following a hike in diesel price. Meanwhile, Food & Non-Alcoholic Beverages eased to 3.5% YoY from 3.8% in July. We expect inflation to continue trending higher in September, partly due to weaker disinflationary pressure in the transportation sector. In view of the generally high base effect from the implementation of GST last year, we expect inflation to remain subdued and to stay below 2.0% YoY for the subsequent months of the year. With a lack of positive catalysts, the outlook for domestic growth prospects with regards to business and consumer spending behaviour remains tepid. As such, we maintain our full-year inflation forecast at 2.1% YoY.

The Consumer Price Index (CPI) rose 1.5% YoY in August, compared with 1.1% YoY registered in July. The headline inflation was above the consensus and house estimates of 1.3% and 1.2% respectively. The CPI grew 0.4% MoM compared with 0.3% in July.

The smaller disinflationary pressure in the transportation sector influenced by a low base effect has helped to lift inflation higher in August. Furthermore, a jump in the Recreation Services & Culture index provided additional upward pressure to the August headline inflation.

The year-to-date growth for CPI was 2.3% YoY compared to 1.9% in the corresponding period a year ago. Meanwhile, core inflation rose 0.2 percentage point to 2.2% YoY in August.

The Food & Non-Alcoholic Beverages index with a 30.2% share of the CPI grew a tad slower at 0.2% MoM in August, compared with 0.3% in July. This is likely a reflection of reduced food demand post-Eid festive period. Meanwhile, the United Nations Food and Agriculture Organisation’s (FAO) Food Price index increased 1.9% MoM in August, confirming our previous suspicion that July’s downturn was merely a breather.

On a YoY basis, the price growth in Food & Non-Alcoholic Beverages index moderated for two consecutive months to 3.5% in August, compared to 3.8% in July. This is also lower than its year-to-date growth of 4.2% YoY.

Inflation in the Housing, Water, Electricity, Gas & Other Fuels category (23.8% share of CPI) was lower in August at 2.1% YoY compared to 2.4% YoY in July. However, on a MoM basis, the price accelerated to a three-month high of 0.4%.

Transport cost (13.7% share of CPI) declined at a softer rate of 6.7% YoY (July: -9.9%). This is due to a lower base comparison following a diesel and unleaded fuel price cut of 10 sen in the corresponding month of last year. In August, the unleaded fuel remained unchanged but diesel price was raised by 10 sen. This is reflective of the 0.8% MoM growth in the transport index in August.

The world’s major economies are largely mired in weak inflation. Japan is facing persistent deflation while China’s August inflation moderated for a fourth month to 1.3% YoY from 1.8% YoY in July. Eurozone inflation remained soft at 0.2% YoY in August. Meanwhile, U.S. inflation rose more than expected to 1.1% YoY in August, bolstering prospect of U.S. Fed rate hike before the end of the year.4

Outlook

We expect inflation to trend higher in September, partly due to weaker disinflationary pressure in the transportation sector. Although the RON95 and RON97 petrol prices were cut by 5 sen in September, the prices saw a larger decline of 10 sen in corresponding month of last year. Meanwhile, in view of the generally high base effect from the implementation of GST last year, we expect inflation to remain subdued and to stay below 2.0% YoY for the subsequent months of the year.

With a lack of positive catalysts, the outlook for domestic growth prospects with regards to business and consumer spending behaviour remains tepid. In addition, low crude oil prices and tight lending conditions would continue to keep domestic inflation in check. We maintain our full-year inflation forecast at 2.1% YoY.

The recent weakening of the ringgit would likely not influence domestic inflation in a significant way, as local businesses might choose to absorb any rising costs from weaker currency and refrain from raising prices amidst weak consumer sentiment and sluggish economic conditions. This would also encourage import substitution by local producers.

Though inflation has perked up it remains relatively low and could still provide BNM the flexibility to ease its monetary policy if needed. For now we expect BNM to keep the OPR at 3.00% for the remainder of the year. If disinflationary trend continues unabated along with a steeper downtrend in the domestic economy it may give BNM more room to cut interest rates.

Source: Kenanga Research - 22 Sep 2016