OVERVIEW

• Consumer price index jumped 3.2% YoY. While it was in line with the house estimate the spike in CPI exceeded Bloomberg’s median consensus estimate of 2.7%. On a MoM basis, inflation likewise spike 1.1% from 0.0% during the previous month.
• Transportation price uplift. By category, the Transportation index rebounded sharply at 8.3% YoY, after declining 0.6% in December. In MoM terms, it rose at a higher 5.9% (December: -1.5%) from higher fuel prices. Food prices saw a modest 4.0% growth (December 3.7%), likely from a combination of subsidy removal and festive season increases.
• Inflation remains under control; OPR likely maintained. With the coming monetary policy meeting coming up next week, we believe that the OPR will likely be retained at 3.00%. Our view remains that the present OPR levels continue to be accommodative on growth while inflation remains manageable.

Consumer price index spikes. The consumer price index rose to an 11-month high of 3.2% YoY in January from 1.8% in the previous month, exceeding the Bloomberg’s median consensus estimate of 2.7%. The house estimate was spot on. As anticipated, inflation from the transportation index (particularly from the RM0.20/litre increase for RON95 and Euro 5 Diesel and RM0.15/litre increase for RON97) contributed heavily to the January’s elevated inflation levels. On a MoM basis, the CPI rose by a sharper 1.1% after remaining flat in December. The MoM CPI growth was likewise 1.1% after seasonal adjustment

Transportation in the spotlight. Transportation (13.7% of CPI) prices was one of the main standout of January’s inflation numbers, rising 8.3% YoY as the impact of the aforementioned fuel prices hikes. This compared to a mild 0.6% YoY decline in the transportation index in December. On MoM terms, it rose at a stronger 5.9% (December: -1.4%), a 22-month high. This confirms our suspicion that the transportation sub-index is on a reversal path, after 10 consecutive months of YoY decline, particularly as OPEC’s move to limit oil prices is starting to show a more pronounced impact on Malaysia’s inflation numbers.

Food inflation a touch higher. Food and non-alcoholic beverages (30.2% of CPI) prices was a touch higher at 4.0% (December: 3.7%), a six month high. In MoM terms, inflation rose at a quicker pace of 0.9% (December: 0.6%). As in December, we are continuing to see elevated cooking oil prices at play from the general dismantling of cooking oil subsidies – cooking oil prices rose 47.2% during the month (December 45.9%). Furthermore, the January festivities have also placed some upward pressure on inflation moving into January, resulting in modest broad based food price increases for vegetables (7.8%), fish and seafood (6.1%) and meat (2.0%)

Housing, water, electricity, gas and other fuels somewhat flattish. The housing, water, electricity, gas and other fuel subindex (23.8% of CPI) trajectory has been somewhat unchanged with a 1.9% rise after increasing by 2.1% for five consecutive months prior. On a MoM basis, the index was static, similar to that of December.

Global inflation generally trending up. After a diverse December reading, global inflation is picking up generally, particularly with the Eurozone with inflation hitting a 47 month high at 1.8% YoY (December 1.1%). Inflation in China and Indonesia has likewise started accelerating after a lull in December where inflation moderated somewhat. This may be indicative of a global recovery momentum driving up inflation. Of particular importance, however, is the rise in US inflation to 2.5% YoY (December 2.1%), marking a 58-month high. This, along with US tighter labour market and a host of other economic data, lends increasing weight to the idea of a Fed rate hike come 15 March 2017. The probability of a March Fed rate hike, implied by the Federal Fund Futures, currently stands at 38.0% from 32.0% at the conclusion of the Jan-Feb FOMC meeting.

OUTLOOK

Fuel prices to continue driving inflation. With the continued increase in fuel prices (RM0.20/litre increase for RON95 and RON97 and and RM0.10/litre increase for diesel prices) in February, inflation would remain elevated. Moreover, given that consumer price index was somewhat static during February 2016 (indeed, the index declined somewhat in March 2016), we expect that the low base effect will result in likewise elevated inflation rates for the whole of 1Q17 which we predict may come close to 4.1% (2.2% previously).

Recovering commodities to further fuel inflation. Despite signs of rising shale oil production, OPEC’s report of high compliance in its output curbs which will further contribute to lowering excess oil inventories mean that oil prices is likely to continue trading around USD55/barrel in February. With oil prices likely to be sustained at USD55/barrel, but not likely to exceed USD57/barrel from US shale production, we expect inflation from the transportation sub-index to be sustained, further fuelling inflation for 2017. Along with a steady rise in global growth as well as domestic demand, we will not be surprised if full year CPI would exceed 4.0% in 2017.

Managing inflation; accommodating growth. With the coming monetary policy meeting coming up next week, we believe that the OPR will likely to be retained at 3.00%. Our view remains that the present OPR levels continue to be accommodative of growth while inflation remains manageable. Just as importantly, we believe that the prevailing OPR rates are conducive to financial and monetary stability, at least for the 1H17. Furthermore, rising odds of a March 2017 Fed rate hike may warrant a more cautious stance in either direction, especially in the context of a weaker ringgit and a gradual recovery momentum. On price stability, we believe that present inflation, though elevated, remains manageable for now. As the current price spike is largely attributable to supply-side factors rather than demand consideration, it is likely that the OPR be maintained at present levels to be supportive of the current growth momentum.

Source: Kenanga Research - 23 Feb 2017