OVERVIEW

• Higher inflation after a 4-month lull. August’s consumer price index (CPI) broke its four month declining streak in Apr-Jul17, with a CPI inflation of 3.7% (Jul: 3.2%), higher than consensus estimates of 3.4% and the house estimate of 3.6%.
• Higher inflation driven by transportation sector. The transportation index again rose by a double-digit pace of 11.7% after a relatively tame 7.7% transportation inflation in July. This was largely fuelled by broad increases in prices of retail fuel. On a MoM basis, the index expanded 4.6% (Jun: -1.1%).
• Food price inflation rises slightly. Food inflation rose at a slightly faster 4.3% (Jul: 4.2%) after easing two consecutive months in Jun-Jul17. In MoM terms, the food index likewise rose faster with a growth of 0.4% (Jul: 0.2%).
• Core inflation falls; likely from higher base. Broader price trends, as measured by the changes in the core CPI fell back to 2.4% (Jul: 2.6%). However, this may likely be attributed to the higher base effect observed during Aug 16. Overall, this broadly points to stable demand-pull factors to inflation.
• Tame inflation points to neutral OPR trajectory. Notwithstanding higher inflation – largely from supply-side factors – stable demand-factors suggest that inflation is largely manageable for now. Indeed, present supply-based inflation remains significantly below March’s 5.1% where the MPC stayed put on the OPR. We therefore believe that the MPC will likewise not alter the prevailing OPR level of 3.00% for the rest of 20

Inflation picks up. August’s consumer price index (CPI) accelerated to 3.7% from July’s seven-month low of 3.2%. August’s numbers was above the consensus estimates calling for a 3.4% inflation (ranging from 2.9-3.8%) and was just slightly lower than the house estimates calling for 3.6% inflation. These numbers also represent a break from the decelerating inflation observed during Apr-Jul17. On a MoM basis, the CPI was likewise higher by 0.9% (Jul: -0.1%) after declining for five consecutive months prior. The CPI inflation rose by a similar degree on a seasonally-adjusted basis.

Core inflation recedes again. Underlying inflation, as measured by core inflation moderated somewhat to 2.4% YoY (Jul: 2.6%) though this was likely reflective of a higher base effect since Aug16 rather than a significant deterioration of underlying inflation – on a MoM basis, core inflation actually rose by a faster 0.3% (Jul: 0.2%).

Higher fuel prices bump up transportation inflation. The transportation index (comprising 13.7% of the headline CPI) rose by 11.7% (Jul: 7.7%), moving back to double-digit areas after a one-month lull in the previous month. This bucks the four-month trend of moderation in the YoY figures since April as transportation inflation spiked at 23.0% in March (a 123- month high). On a MoM basis, the index expanded by 4.6% after declining for 5 consecutive months since March. These

increases match our predictions in previous report which posited higher inflation from dearer retail fuel prices, particularly that of RON95.

Retail fuel prices rise again. The weighted average retail prices for RON95, RON97 and diesel rose to RM2.118/litre, RM2.387/litre and RM2.037/litre respectively (Jul: RM1.958/litre, RM2.212/litre and RM1.934/litre respectively). On a weekly basis and up to 20th September, the retail price of fuels rose for approximately 11-consecutive weeks starting late-June/early July (including two weeks where retail fuel prices were unchanged) though it declined slightly for the week starting 21st

September. This was largely in line with crude oil prices trading at a narrower but higher range of USD49-53/barrel during the month (Jul: USD47-52/barrel).

Food prices rises slightly faster. The food and non-alcoholic beverages index (comprising 30.2% of headline CPI) was largely stable overall, rising by a slightly faster 4.3% (Jul: 4.2%) after easing for two consecutive months in Jun-Jul17. On a MoM basis, food prices rose by a slightly higher pace of 0.4% (Jul: 0.2%). Noteworthy among these increases are the fish and seafood components which rose by a faster 8.1% (Jul: 6.7%), notably from Indian and Spanish mackerel, cuttlefish and prawn, among others. However, slower inflation in other major food categories, notably food away from home (Aug: 4.8%; Jul: 4.9%), fruits (Aug: 3.2; Jul: 3.6) and vegetables (Aug: 2.9; Jul: 3.3), among others, dragged down food inflation.

Global food prices eases slightly. The Food and Agriculture Organisation (FAO) Food Price Index eased slightly, falling by just 1.3% MoM in August (Jul: +2.2%). While the vegetable oil price index strengthened on broad-based improvements in import demand and lower-than-expected production of palm oil, soy, rapeseed and sunflower oil, this was overall mitigated by overall decline in the cereals, sugar and meat sub-indices owing to improved production and yields among major production centres.

Housing, water, electricity, gas and fuel prices speed up. The housing, water, electricity, gas and fuel index (which comprises 23.8% of headline CPI) rose by a faster 2.4% YoY. This came as the index recorded a 0.6% growth MoM (Jul: 0.0%).

Inflation trending higher globally. Globally, inflation is likewise appearing to pick up. In the US, with their CPI rising by 1.9% YoY in August (Jul: 1.7%), lending some support to the hawk’s case of continuing policy tightening though August’s number continue to represent a decline from the above-2.0% CPI inflation observed during 1Q17. In the Eurozone, the CPI likewise grew at a faster rate of 1.5% in August (Jul: 1.3%), potentially swaying the ECB’s hand on winding down its ultraeasy monetary policy (though ECB reassured that ultra-low interest rates are expected to remain for an “extended period”). Elsewhere, Japan sustained its inflation for the tenth consecutive months to July with a stable 0.4% from Apr-Jul. Moving closer to home, inflation trended slightly lower in Indonesia (Aug: 3.8%; Jul: 3.9%) but was otherwise higher in Philippines (Jul: 3.1%; Jun: 2.8%), Thailand (Aug: 0.3%; Jul: 0.2%), Singapore (Jul: 0.6%; Jun: 0.5%) and Vietnam (Aug: 3.4%; Jul: Jul: 2.5%).

OUTLOOK

Further inflation to be fuelled by retail oil prices. With the retail prices of RON96, RON97 and diesel continuing its rising for its 11th week up to 20th September before declining slightly in the week ended 27th September, we expect supply-based factor to continue seeping into the inflation equation for September. Up to the week ending 27th September, the weighted average prices of RON95, RON97 and diesel rose to RM2.191/litre, RM2.484/litre and RM2.084/litre respectively (Aug: RM2.118/litre, RM2.387/litre and RM2.037/litre respectively).

increases match our predictions in previous report which posited higher inflation from dearer retail fuel prices, particularly that of RON95.

Retail fuel prices rise again. The weighted average retail prices for RON95, RON97 and diesel rose to RM2.118/litre, RM2.387/litre and RM2.037/litre respectively (Jul: RM1.958/litre, RM2.212/litre and RM1.934/litre respectively). On a weekly basis and up to 20th September, the retail price of fuels rose for approximately 11-consecutive weeks starting late-June/early July (including two weeks where retail fuel prices were unchanged) though it declined slightly for the week starting 21st

September. This was largely in line with crude oil prices trading at a narrower but higher range of USD49-53/barrel during the month (Jul: USD47-52/barrel).

Food prices rises slightly faster. The food and non-alcoholic beverages index (comprising 30.2% of headline CPI) was largely stable overall, rising by a slightly faster 4.3% (Jul: 4.2%) after easing for two consecutive months in Jun-Jul17. On a MoM basis, food prices rose by a slightly higher pace of 0.4% (Jul: 0.2%). Noteworthy among these increases are the fish and seafood components which rose by a faster 8.1% (Jul: 6.7%), notably from Indian and Spanish mackerel, cuttlefish and prawn, among others. However, slower inflation in other major food categories, notably food away from home (Aug: 4.8%; Jul: 4.9%), fruits (Aug: 3.2; Jul: 3.6) and vegetables (Aug: 2.9; Jul: 3.3), among others, dragged down food inflation.

Global food prices eases slightly. The Food and Agriculture Organisation (FAO) Food Price Index eased slightly, falling by just 1.3% MoM in August (Jul: +2.2%). While the vegetable oil price index strengthened on broad-based improvements in import demand and lower-than-expected production of palm oil, soy, rapeseed and sunflower oil, this was overall mitigated by overall decline in the cereals, sugar and meat sub-indices owing to improved production and yields among major production centres.

Housing, water, electricity, gas and fuel prices speed up. The housing, water, electricity, gas and fuel index (which comprises 23.8% of headline CPI) rose by a faster 2.4% YoY. This came as the index recorded a 0.6% growth MoM (Jul: 0.0%).

Inflation trending higher globally. Globally, inflation is likewise appearing to pick up. In the US, with their CPI rising by 1.9% YoY in August (Jul: 1.7%), lending some support to the hawk’s case of continuing policy tightening though August’s number continue to represent a decline from the above-2.0% CPI inflation observed during 1Q17. In the Eurozone, the CPI likewise grew at a faster rate of 1.5% in August (Jul: 1.3%), potentially swaying the ECB’s hand on winding down its ultraeasy monetary policy (though ECB reassured that ultra-low interest rates are expected to remain for an “extended period”). Elsewhere, Japan sustained its inflation for the tenth consecutive months to July with a stable 0.4% from Apr-Jul. Moving closer to home, inflation trended slightly lower in Indonesia (Aug: 3.8%; Jul: 3.9%) but was otherwise higher in Philippines (Jul: 3.1%; Jun: 2.8%), Thailand (Aug: 0.3%; Jul: 0.2%), Singapore (Jul: 0.6%; Jun: 0.5%) and Vietnam (Aug: 3.4%; Jul: Jul: 2.5%).

OUTLOOK

Further inflation to be fuelled by retail oil prices. With the retail prices of RON96, RON97 and diesel continuing its rising for its 11th week up to 20th September before declining slightly in the week ended 27th September, we expect supply-based factor to continue seeping into the inflation equation for September. Up to the week ending 27th September, the weighted average prices of RON95, RON97 and diesel rose to RM2.191/litre, RM2.484/litre and RM2.084/litre respectively (Aug: RM2.118/litre, RM2.387/litre and RM2.037/litre respectively).

Source: Kenanga Research - 21 Sept 2017