• February CPI exceeds expectation at 4.5% YoY. The elevated consumer price inflation exceeded Bloomberg’s median estimate of 3.9% and was a touch higher than the house estimates of 4.3%. The level is the highest since the height of the Global Financial Crisis around the end of 2008. On a MoM basis, inflation accelerated to 1.3% (Jan: 1.1%).
   
• Base effect, weak ringgit and rising fuel price pushed CPI higher. Apart from the impact of a lower base last year and the weak ringgitrising fuel price was the most salient behind the CPI jump. This is mainly reflected in the sharp increases of the index of transportation. The transportation subindex saw, by far, the highest contribution to the headline figures, surging 17.9% YoY (Jan: 8.3%) on the back of 5.5% MoM growth (Jan: 5.9%). Food prices, meanwhile, was slightly higher at 4.3% YoY (Jan: 4.0%).
   
• Cost push factors drives elevated inflation. Given elevated fuel prices, which may translate into higher food prices, we expect inflation to remain elevated for the rest of 1Q17 and likely into 2Q17. We are revising our 1Q17 estimates to 4.4% from our previous 4.1% estimates. For now, our full year forecast remains at 3.8%.
   
• Monetary policy to remain unchanged. However, we do not believe that the cost-push driven inflationary trend will result in a sharp change in monetary policy stance with the OPR projected to remain at 3.00%, at least for 1H17.

Consumer price index continued ascent. The consumer price index rose 4.5% YoY, hitting a 99-month high (since December 2008) when Malaysia felt the full brunt of the Global Financial Crisis (GFC). February’s inflation exceeds Bloomberg’s median estimates of 3.9% and was a touch higher than the house estimates of 4.3%. In MoM terms, February’s inflation was also higher at 1.3% (Jan: 1.1%), coinciding with its seasonally adjusted 1.3% MoM inflation (Jan: 1.1%). Core inflation also edged higher at 2.5% YoY (Jan: 2.3%).

Base effect, weak ringgit and rising fuel prices. Apart from the impact of a lower base last year and the weak ringgit, rising fuel price was the most salient behind February’s CPI sharp rise. This is mainly reflected in the sharp increases of the index of transportation and food.

Transportation continually driving inflation. The transportation subindex (comprising 13.7% of headline CPI) continued to be a standout among the inflation numbers, surging 17.9% YoY as the pass-through impact of higher fuel prices continue to flow into the subindex. February’s numbers represents an acceleration of the subindex from January’s 8.3%. Previously, the transportation subindex has been contracting for ten consecutive months from March to December 2016.

Food inflation trends slightly higher. The food and nonalcoholic beverages (comprising 30.2% of headline CPI) continued to trend slightly higher at 4.3% (Jan: 4.0%). In MoM terms, food price inflation was stable at 0.9% (Jan: 0.9%). As in the previous month (and indeed, since December), higher cooking oil prices was a major factor on the rising food price inflation. It surged 47.9% during the month (Jan: 47.2%). We expect this to persist following the Cooking Oil Price Stabilisation Scheme that commenced 1 November 2016. Other food items also saw modest price increase with the vegetable subgroup and meat subgroup seeing slightly higher inflation at 9.5% (Jan: 7.8%) and 4.6% (Jan: 2.0%) respectively.

Fuel prices upward adjustment. As mentioned in our previous report, February’s inflation was largely affected by higher retail fuel prices (from the RM0.20/litre increase for RON95 and RON97 and RM0.10/litre increase for diesel prices in February). Meanhile, the average ringgit in February depreciated by about 6.0% relative to the US dollar when compared to its average in February last year.

Marginal uptick in Housing, water, electricity, gas and other fuels. The housing, water, electricity, gas and other fuel subindex (comprising 23.8% of headline CPI) was slightly elevated, growing 2.2% after a breather in January where it rose by just 1.9% YoY. On a MoM basis, the subindex was slightly higher at 0.7% after remaining flat in December and January.

Diverging global inflation trends. Among the Western advanced market economies (AME), inflation appeared to continue picking up pace in February. The US and Eurozone saw inflation edging higher at 2.7% and 2.0% respectively (Jan: 2.5% and 1.8% respectively). Inflation also showed signs of firming in the UK and Germany at 2.3% and 2.2% respectively (Jan: 1.8% and 1.9%) though inflation seem to moderate slightly in France at 1.2% (Jan: 1.3%). However, in Asia, inflation was more subdued with China and Korea reporting 0.8% and 1.9% YoY respectively (Jan: 2.5% and 2.0% respectively).

OUTLOOK

Continued increase in inflation. With the mild increase in fuel prices during March (no change in RON95 and RON97 prices but a RM0.05/litre increase for diesel prices), we expect inflation to remain somewhat elevated from fuel related factors. Furthermore, March 2017’s inflation will also be influenced by low base effect given a relatively sharp moderation in inflation during March 2016. Combined, this may result in inflation seeing a one-off spike exceeding 5.0% percent in March. With inflation moving higher than our base-case forecast, we are revising our 1Q17 inflation to 4.4% from our previous estimates of 4.1%.

Oil price trajectory uncertain. For the full year, our projections will be highly influenced by the developments of OPEC’s production curbs. Despite relatively high compliance rates of OPEC’s production curbs, higher shale oil production, continued increase in oil rig counts and stubbornly high US inventories weighs against stabilization of oil prices. However, for now, we expect Brent oil to continue trading within the USD50-55/barrel range. This, in turn, will result in sustained high inflation in the transportation sub-index on pass-through effects.

Watchful on impact of weekly fuel price adjustment. We are also further evaluating the impact of weekly ceiling price mechanism for fuel prices that will kick in starting 29 March; we expect this to result in modest stabilization of oil prices, relative to monthly repricing mechanisms of the current managed float system. The allowance for competitive pricing may also ease some price pressure off the pump, ultimately in favour of the consumers.

OPR to be held amid stable price trends. Despite higher headline inflation figures, the elevated price levels were largely influenced by cost-push factors with domestic demand remaining relatively stable. While February figures suggests higher core inflation of 2.5% (Jan: 2.3%), we believe that inflation levels remain manageable with no material change in underlying demand trends. As such, we maintain our view that BNM is unlikely to change its monetary stance in the absence of a significant upward shift in the broader price trend (which would prompt an OPR hike) or in the absence of significant deterioration to growth (which would prompt an OPR cut). Furthermore, we do not believe that the cost-push driven inflationary trend will result in a sharp change in monetary policy stance with the OPR projected to remain at 3.00%, at least for 1H17.

Source: Kenanga Research - 27 Mar 2017