OVERVIEW

? CPI hits 8-year high. At 5.1% YoY, March consumer price inflation was the highest since November 2008 (5.7%). It was slightly lower than Bloomberg’s median estimate of 5.2% and the house’s 5.3% estimate. March numbers was a step-up from the 4.5% YoY reported in February. On a MoM basis, however, the index marginally fell by 0.1% (Feb: +1.3%).

? Transportation index edges higher. By category, the transportation sub-index stands out as among the largest contributor to the headline inflation, rising 23.0% YoY (Feb: 17.9%). In MoM terms, the sub-index fell slightly by 0.3% (Feb: +5.5%). Food price growth was a touch lower at 4.1% (Feb: 4.3%).

? Cost push inflation amid low base effect. While global fuel prices have stabilised somewhat, low base effect will continue to keep inflation elevated moving into 2Q17 and likely until 3Q17 even if fuel price trajectory remains flat or slips marginally. Again, we are not seeing any significant demand pull catalysts that will significantly tilt BNM’s hand towards raising the OPR anytime soon though any uptick in the broader price trends may tip the scales towards a tighter monetary policy.

Consumer price index accelerates further. The consumer price index hit 5.1% growth YoY, placing it at a 100th-month high (since November 2008). March’s inflation was just under Bloomberg’s median estimates of 5.2% (4.7-5.8%) and the house’s estimates of 5.3%. In MoM terms, March’s inflation fell 0.1% (Feb: 1.3%). Postseasonal adjustment, inflation also saw a small decline of 0.1% MoM (Feb: +1.3%). In terms of the broader price trends, core inflation was unchanged at 2.5% YoY (Feb: 2.5%). March figures bring the 1Q17 inflation to 4.3%, a tad below our 4.4% estimates.

Sharper YoY transportation inflation. The transportation index (CPI weightage of 13.7%) surged 23.0% YoY in March (Feb: 17.9%), its highest since January 2007. This was largely attributable to the low base effect relative to 2016. The sub-index fell slightly by 0.3% on a MoM basis compared to growth in January and February (+5.9% and +5.5% respectively).

The retail fuel adjustment effect. Interestingly, the fuel-subcomponent in the transportation sub-index fell 0.5%, MoM despite prices of RON95 and RON97 staying unchanged (at MYR2.3/litre and MYR2.6/litre respectively from the previous month) while diesel prices increased five sen monthly increase to RM2.2/litre. This could arguably be attributed to the decline in RON95 and RON97 prices during the last two days of March when the weekly oil price announcement kicked in. Retail prices for RON95 and RON97 fell to RM2.13/litre and RM2.41/litre respectively from 30 March until 5 April while diesel prices fell to RM2.11/litre. This brings the estimated weighted average price of RON95 and RON97 at RM2.29/litre and RM2.59/litre respectively, representing a mild MoM drop from February

Food prices moderates. The food and non-alcoholic beverages sub-index (comprising 30.2% of headline CPI) rose 4.1% (Feb: 4.3%), moderating slightly as the corresponding MoM figures showed a 0.3% decline (Feb: +0.9%). Higher cooking oil prices from the end of the Cooking Oil Price Stabilisation Scheme meant that cooking oil prices continued to be elevated by 48.5% YoY. In line with the moderation in the food price inflation, inflation in the vegetable subgroup and meat subgroup moderated to 4.8% and 3.7% respectively (Feb: 9.5% and 4.6% respectively) though the fruit subgroup and fish and seafood subgroup saw a slight uptick in inflation at 3.7% and 5.2% respectively (Feb: 3.4% and 4.5% respectively).

Housing, water, electricity, gas and other fuels sub-index stable. Price movements in the housing, water, electricity, gas and other fuel sub-index (23.8% of CPI weightage) was relatively unchanged, growing 2.1% (Feb: 2.2%). On a MoM basis, the sub-index was flat (Feb: 0.7%).

Inflation stutters among AMEs. Inflation took a breather among the Western Advanced Market Economies (AME) in March with US and EU reporting a more subdued inflation at 2.4% and 1.5% respectively (Feb: 2.7% and 2.0% respectively), largely from a slight retreat in global oil prices, though inflation in UK was held at 2.3%. In Asia, China and Korea reported slightly firming inflation at 0.9% and 2.2% respectively (Feb: 0.8% and 1.9% respectively) though closer to home, Indonesia and Thailand saw inflation similarly moderating at 3.6% and 0.8% respectively (Feb: 3.8% and 1.4%).

OUTLOOK

Inflation peaked but remains elevated. At 5.1%, we expect that consumer price inflation is likely to have peaked given that fuel prices – one of the main driver of inflation – have stabilised somewhat. As a whole, inflation is likely to remain elevated at above 4.0% for 2Q17 and 3Q17 from the lower base effect of 2016. Indeed, we expect inflation in 2Q17 to exceed the 4.3% inflation observed in 1Q17 assuming no sharp slide of crude oil prices. We retain our full year forecast for 4.4% inflation in 2017.

Oil prices at crossroads. Starting 30th March, retail fuel price adjustment moved from a monthly to a weekly price announcement. The average RON95 and RON97 prices for the first four of April stood at RM2.21/litre and RM2.48/litre respectively (weighted average estimates of RM2.29/litre and RM2.59/litre respectively for March). Diesel prices also fell RM2.14/litre (Feb: RM2.19/litre). We expect fuel related inflation to moderate, indeed, decline marginally in MoM terms. However, due to the low base effect, we expect the YoY figures to remain high (but likely not exceeding March’s 23.0%).

Counterbalance risk. However, there are some upward bias on our fuel-induced inflation largely from geopolitical risks in the Middle East (i.e. US bombing in Syria) which may push inflation upwards. On the other hand, this may be somewhat balanced by continued increase in US shale producers, placing an effective floor on oil prices. This sustains our conviction that Brent oil will continue to trade within the USD50-55/barrel range, at least in the near future. This, in turn, will cause the present elevated inflation levels to be sustained, particularly in the transportation sub-index.

No immediate need to alter OPR. One of the more positive news arising from March numbers comes from the stable core inflation which stayed at 2.5%, similar to the previous month. This suggests that the pass through effect from higher oil prices remains largely in check. As a comparison, core inflation in 1Q16 was 3.6%, substantially higher than 2.4% for 1Q17. At the same time, there are no immediate signs that demand trends have turned inflationary. As such, we believe that BNM will likely adopt a more prudent and wait-and-see stance for any further developments in core price trends before triggering any changes to the OPR, hence retaining it at 3.00%, at least in the next six months.

Source: Kenanga Research - 20 Apr 2017