? Inflation continued to ease. June consumer price index (CPI) declined for the third straight month to 3.6% (Mar: 3.9%) lowering its 2Q17’s growth to 4.0% from 1Q17’s 4.3%. It was spot on the house estimate but below market consensus of 3.9%.

? Transportation moderates further. The transportation index, while staying elevated, saw further growth moderation at 10.5% YoY (May: 13.1%) as retail fuel prices continued to fall. It was substantially below March’s peak of 23.0%.

? Modest food inflation. Food price inflation was moderate at 4.3% (May: 4.4%), in spite of the Eid al-Fitr celebrations. On a MoM basis, food price was likewise modest at 0.4% (May: 0.5%).

? Supply-side factors to remain muted. With oil prices and, by extension, retail fuel prices stabilising somewhat, we believe that inflation have stabilised overall. This reinforces our position that inflation will likely taper towards the end of the year, culminating in 4.1% inflation for 2017 though elevated relative to the 2.1% inflation in 2016.

? OPR likely maintained at 3.00%. Despite rising signs of demand-pull factors creeping in, we believe that demandbased signals remain unconvincing to push for a rate hike in 2017. As such, we believe that OPR will remain at the prevailing 3.00% as the MPC awaits further signs of inflation and growth strengthening.

Receding consumer price index. The consumer price index (CPI) continued to fall for the third consecutive month in June with a growth of 3.6% YoY (May: 3.9%) after peaking at 5.1% in March. While June’s number was below the median Bloomberg consensus forecast of 3.9% (ranging 3.6-4.0%), the house estimate was spot-on. June’s reading rounds up the 2Q17 inflation to 4.0% (1Q17: 4.3%), slightly slower than the house’s 2Q17 forecast of 4.1%. On a MoM basis, the CPI fell by 0.2% (Apr: -0.2%), its fourth consecutive month of decline. CPI fell by the same extent after seasonal adjustment. Underlying inflation trend, as measured by core inflation, fell slightly but was otherwise stable at 2.5% (May: 2.6%) after expanding for two consecutive months since April.

Brakes on transportation inflation. As expected, transportation index (comprising 13.7% of headline CPI) continued to fall on a YoY basis for the third consecutive month since April. The transportation sub-index grew by just 10.5% (May: 13.1%), reaffirming our position that growth in the transportation index has long peaked in March where the index spiked 23.0%. On a MoM basis, the transportation index likewise fell 2.4% (May: -3.2%) stemming from continuous decline in retail fuel prices.

Lower price at the pump. Prices at the pump continued to see broad based decline in June, in line with the MoM transportation index. The weighted average prices for RON95, RON97 and diesel fell to MYR2.002/litre, MYR2.267/litre and

MYR1.924/litre respectively (May: MYR2.093/litre MYR2.373/litre and MYR2.025/litre respectively), in line with easing global oil prices.

Modest Eid al-Fitr bump on food prices. Despite the expectation of an acceleration in the growth of the food price index (comprising 30.2% of headline CPI) largely attributable to the month of Ramadan and eventual Eid al-Fitr celebrations, it decelerated instead, albeit slightly. The food and non-alcoholic beverages index rose 4.3% just a tad lower than May’s 4.4%. But prices remained manageable overall, likely from pre-emptive price controls put in place. For major food categories, oil and fats rose by 39.4% (May: 38.9%), fish and seafood rose 7.2% (May: 7.7%) and meat rose 4.2% (May: 5.1%). In general, food prices rose by a smaller quantum in June relative to May (0.4% MoM inflation compared to 0.5% MoM in May). Global food prices also saw slower inflation in June, rising by 1.4% MoM (May: 2.2%), largely driven by higher cereal, dairy and meat prices.

Housing, water, electricity, gas and fuel prices stable. The housing, water, electricity, gas and fuel index (comprising 23.8% of headline CPI) were unchanged at 2.2% YoY. The index was flat MoM.

Soft global inflation overall. With several exceptions, inflation was largely subdued globally, in line with lower oil prices taking the edge off retail prices. Inflation in the Eurozone and US both fell to 1.3% and 1.6% respectively (May: 1.4% and 1.9%). Softer inflation in these economies may boost the doves’ case in the ECB and among the Federal Reserve against tightening monetary policy. Elsewhere, inflation was likewise softer in the UK and South Korea, putting to doubt any monetary tightening agenda in these economies. Closer in the ASEAN region, Thailand reported a mild deflation of 0.1% after a flattish inflation in June.

OUTLOOK

July’s inflation likely to remain subdued. While retail fuel prices have risen slightly for two consecutive weeks since the week beginning 6 July (staying flat on the week starting 20 July), it remains under the weighted average prices of June. This suggests little signs of an uptick from the transportation moving into July and likely further moderation of transportation inflation. While lingering effects of the Eid al-Fitr may elevate food inflation somewhat, price levels are expected to remain staid overall for July.

Easing supply-side factors. With oil prices likely to remain flat moving forward, we believe that supply-side factors – particularly from fuel price passthrough effects – will likewise play a minor role in further influencing price levels. Thus far, oil prices remain weak despite OPEC action and budding tension among the oil producing Gulf Cooperation Council (GCC) countries. We expect oil prices to remain weak for the rest of 2017, albeit elevated relative to 2016, hovering at the USD47- 52/barrel levels (2016: USD41/barrel). However, despite moderating supply-side factors, inflation will likely remain significantly higher than 2016’s 2.1%. For now, we are projecting the full year 2017 inflation at 4.1% with some room for further moderation if oil prices continue to falter.

Demand-pull factors incoming? Growth of retail trade sales have moved to double-digit levels since March. As at May, retail trade sales grew by 13.1% YoY while the corresponding retail trade index grew by 10.7%. Combined with the generally positive growth variables that we have observed of late, we suspect that demand-side factors may play a more active role in determining inflation trajectory, possibly by 3Q17. This may help sustain inflation at the mid-3.0-4.0% levels during 3Q17, especially considering low base effects from a mild 3Q16. However, we believe that present demand growth remains insufficient to justify the case for the OPR tightening. Instead, we continue to expect the OPR to remain unchanged at 3.00% for the rest of 2017 as the MPC await multi-period signs of robust demand recovery before considering tightening the monetary levers.

Source: Kenanga Research - 20 Jul 2017