OVERVIEW

Consumer price inflation remained unchanged at 1.5% YoY in September, lower than the consensus and house forecasts of 1.8% and 1.6% respectively. Lower food prices have largely capped the upward momentum of inflation for the month despite the weaker disinflationary pressure in the transportation sector. By category, Transport saw a smaller decline of 5.5% YoY in September (August: -6.7%) mainly due to a low base effect. Meanwhile, Food & Non-Alcoholic Beverages moderated for the third month to 3.0% YoY from 3.5% in August. Going forward, we expect inflation to end the year on a slightly higher ground. We see factors including the recent recovery in oil price, the upcoming removal of cooking oil subsidy in November and year-end festivities to provide elevated inflationary pressure in the coming months, primarily to reflect in the Food & Non-Alcoholic Beverage category. We project the inflation to average higher around 1.5% YoY in 4Q16 from 1.3% YoY in 3Q16. As we have imputed the possibility of rising food prices in 4Q16, we maintain our full-year inflation forecast at 2.1% YoY.

The Consumer Price Index (CPI) stabilized in September, rising at the same pace of 1.5% YoY as in August. The headline inflation was below the consensus and house estimates of 1.8% and 1.6% respectively. On a monthly basis, the CPI declined 0.3% compared with a 0.4% increase in August.

A moderation in the yearly growth of Food & Non-Alcoholic Bev category has largely kept the headline inflation low and stable, despite the weaker disinflationary pressure in the transportation sector.

The year-to-date growth for CPI was 2.2% YoY compared to 1.9% in the corresponding period a year ago. Meanwhile, core inflation moderated slightly to 2.1% YoY from 2.2% YoY in August.

The Food & Non-Alcoholic Beverages index with a 30.2% share of the CPI declined 0.2% MoM in September, mainly due to higher production of fresh food. Meanwhile, the United Nations Food and Agriculture Organisation’s (FAO) Food Price index growth accelerated to 10.0% YoY in September from 7.1% in August, pointing to a firmer global food price uptrend.

On a yearly basis, Food & Non-Alcoholic Beverages index growth moderated for the third month to 3.0% in September (August: 3.5%). The index grew at a comparatively higher 4.1% year-to-date, driven by stronger inflation in 1H16.

Inflation in the Housing, Water, Electricity, Gas & Other Fuels category (23.8% share of CPI) was stable at 2.1% YoY in September. On a monthly basis, the price was unchanged after a three-month high of 0.4% registered in August.

Transport cost dropped at a slower rate of 5.5% YoY (August: -6.7%). Low base effect was again attributable to the smaller yearly decline, as diesel and unleaded fuel price fell by 15 sen and 10 sen respectively in the corresponding month of last year. In September, the unleaded fuel price was reduced by only 5 sen while diesel price remained unchanged. The transport index fell 1.6% MoM in September.

The world’s major economies mostly experienced higher inflation in September, dispelling the earlier deflationary concerns. Inflation in both Eurozone and U.S. registered a 23-month high of 0.4% YoY and 1.5% YoY respectively. The strong inflation data further bolsters the prospect of U.S. Fed rate hike before the end of the year. While Japan is mired in persistent deflation, Singapore saw a milder deflation of 0.3% in August, a positive sign for the trade-reliant economy.

Outlook

Going forward, we expect inflation to end the year on a slightly higher ground. With the upcoming removal of cooking oil subsidy in November, we see the domestic food prices to experience rising inflationary pressure in the coming months. In addition, the year-end festivities will likely create some demand pull inflation in 4Q16, primarily reflected in the Food & NonAlcoholic Bev category. We project the inflation to average higher around 1.5% YoY in 4Q16 from 1.3% YoY in 3Q16. As we have imputed the possibility of rising food prices in 4Q16, we maintain our full-year inflation forecast at 2.1% YoY.

The transportation sector would likely still experience high disinflationary pressure in October as a result of high base effect. Although diesel price was raised by 5 sen in October, the prices saw a larger increase of 10 sen in corresponding month of last year. However, we expect the recent recovery in oil price, which have currently reached above $50/barrel, to have a more dominant effect in reducing disinflationary pressure of transportation sector in the last two months of the year, providing additional lift to headline inflation in 4Q16.

Although the Budget 2017 announced on Friday is short of major stimulus measures as anticipated by the market, it does include measures aimed at boosting the income of lower income group, including the increase in BR1M amount in 2017. We believe it will help underpin domestic demand and spending. In view of the local economy still holding up well, we expect BNM to keep the OPR at 3.00% for the remainder of the year. However, in the case of unexpected deterioration in domestic demand along with a steeper downtrend in the global economy, the current low inflation may give BNM more room to cut interest rates if needed.

Source: Kenanga Research - 24 Oct 2016