• CPI inflation eases further, in line with house estimate. May’s consumer price fell for the second straight month to 3.9% (Apr: 4.4%), in line with the house expectation though it was lower than Bloomberg’s median estimates of 4.1%.
• Transportation index declines further but remains elevated. The transportation index rose by a slower 13.1% YoY (Apr: 16.7%) though it continued its three consecutive month streak of MoM decline to -3.2% (Apr: -1.9%). However, the transportation index remains high, by historical standards, likely from a low base effect observed in 2015-2016.
• Food inflation rising. Food prices saw modest increase with the index rising 4.4% YoY (Apr: 4.1%). In MoM terms, the food index expanded by 0.5% (Apr: 0.1%).
• Modest increase in broader price trends. Broader price trends remain stable though core inflation has inched up to 2.6% (Apr: 2.5%). With inflation plateauing to moderating somewhat, we are revising our 2Q17 inflation down to 4.1% though for now, we are retaining our full year 2017 forecast at 4.4%.
• No immediate catalyst for OPR revision. With inflation likely to have peaked in March and price trends remaining stable overall, we reiterate our view that BNM would maintain the Overnight Policy Rate at 3.00% for the rest of the year. Indeed, given that the initial oil induced inflation have receded, the case for dampening inflation remains weak in the absence of multi-period improvements at the demand side.

Consumer price index continues to ease. The consumer price index (CPI) retreated further in May, with a mere 3.9% YoY expansion (Apr: 4.4%). This places inflation just above the 3.2% inflation in January; YoY inflation is presently at a four month low. May’s inflation was slightly below Bloomberg’s median estimates of 4.1% (ranging from 3.7-4.4%) though it was in line with the house’s estimates of 4.4%. On a MoM basis, the CPI continued to recede 0.2% (Apr: -0.3%), falling for the third consecutive month. Post-seasonal adjustment, CPI fell by a similar degree. Core inflation, meanwhile, was slightly higher at 2.6% (Apr: 2.5%), extending its growth for the fourth consecutive month since April.

Sharper slowdown in transportation inflation. The transportation index (comprising 13.7% of headline CPI) grew at a lower 13.1% (Apr: 16.7%). As with the previous month, this is likely induced by a stretch of low base effect observed from 2015-2016. Indeed, the transportation index fell by 3.2% MoM (Apr: -1.9%), its sharpest fall in 14 months.

Broad based fall of pump prices. In line with the MoM deterioration of the transportation index, the weighted average prices for RON95, RON97 and diesel fell further to MYR2.09/litre, MYR2.37/litre and MYR2.02/litre respectively (coming off from April’s MYR2.21/llitre, MYR2.48/litre and MYR2.14/litre respectively).

Food price inflation back in focus. The food and non-alcoholic beverages sub-index (comprising 30.2% of headline CPI) grew by a faster 4.4% (Apr: 4.1%). Growth in the food and beverages index was mostly broad based with all categories, except milk and eggs and the non-alcoholic beverages categories, increasing. Standouts include the oil and fats (May: 38.9% v. Apr: 39.1%), fish and seafood (May: 7.7% v. Apr: 6.2%), meat (May: 5.1% v. Apr: 4.2%) and fruits (May: 3.3% v. Apr: 2.4%). This was likely a result of the prelude and the start of the Ramadan month which began 27 May 2017. The Food & Agriculture Organisation (FAO) food price index likewise saw a MoM increase of 2.2% after a 1.6% decline in April, with all of its constituent commodity indices, with the exception of its sugar price sub-index, seeing broad increases during May.

Inflation somewhat softer among AMEs. Globally, inflation has softened somewhat among the advanced market economies (AME), most notably in the US which saw May CPI inflation falling to 1.9% (Apr: 2.2%), putting to question on the Fed’s plan to continue its monetary tightening after its last June rate hike. Inflation was likewise softer in the Eurozone (May: 1.4% v. Apr: 1.9%), despite a continuation of ECB’s relatively easy monetary policy. China, meanwhile, saw inflation rising at a faster clip of 1.5% (Apr: 1.2%). Closer to home, neighbouring Indonesia’s inflation rose marginally to 4.3% (Apr: 4.2%) though Thailand saw flat price levels (Apr: 0.4%).

OUTLOOK

June’s interplay of higher food prices and cheaper fuel. With the bulk of Ramadan in June and the upcoming Eid al-Fitr celebrations coming up later, food prices are expected to see seasonal increases in June. These increases will likely be modest given broad price controls in place. However, this is likely to be mitigated somewhat by cheaper prices at the pump, particularly as the extension of the OPEC oil cut saw little impact to overall global oil prices. Instead, retail fuel prices have broadly fallen for the first four weeks of June, likely to result in further moderation in the transportation sub-index in June.

Downward revision of 2Q17 inflation. With oil prices likely to remain on the downside in the near future and with a faster disinflation in 2Q17, we believe that a downward revision to the 2Q17 inflation is justified. As such, we are revising our 2Q17 inflation to 4.1% from 4.4% previously due to persistent weaknesses in oil prices and the generally weak oil prices observed during the quarter. For now, we are retaining our full year 2017 forecast of 4.4% though with a view of revising this forecast downwards on further oil price weaknesses.

Nascent demand-push factors. Despite lower headline inflation, core inflation rose slightly to 2.6%, its fourth consecutive increase since February. With oilrelated factors and other supply-side factors playing a lesser role in influencing price levels – despite remaining elevated relative to 2015-2016 – we are seeing some signs of demand-push factors seeping into the inflation narrative. These signs include the improvement in headline GDP observed for 1Q17, modest growth in wholesale and retail trade in April (8.6% and 12.9% respectively; Mar: 8.0% and 11.8% respectively) and a slight increase in loan growth (Apr: 6.1% v. March: 6.0%). This is consistent with healthier economic fundamentals observed in the economy though inflation is presently not excessive. As such, we reiterate our view that the OPR is likely to remain unchanged at 3.00%, at least in the next six months. On budding demand push factors seeping into the inflation narrative, we believe that this may prompt a lean towards hawkish stance moving forward, though the MPC is likely to await multi-period signs of demand recovery before raising interest rates. With oil prices scaling back to below USD45 per barrel and the downtrend trend are likely to sustain over the coming months we believe that there is a strong possibility that BNM would maintain its current accommodative monetary stance for the rest of the year.

Source: Kenanga Research - 22 Jun 2017