Overview

? Inflation rises to a 5-month high. September’s CPI rose to a five-month high of 4.3% (Aug: 3.7%). This was in line with the consensus estimates and was just slightly under the house estimate of 4.4%. September’s numbers rounds up 3Q17 at 3.8% (2Q17: 4.0%).

? Higher retail fuel prices continue to weigh. Higher inflation was largely attributable to increased retail fuel prices. The transportation index rose by a sharper 15.8% (Aug: 11.7%) though growth in retail fuel prices have flattened somewhat, especially on a MoM basis.

? Food inflation stable but elevated due to base effect. Food inflation was higher at 4.6% (Aug: 4.3%) though this was likely due to base effects given relatively stable, if mixed, trajectory of prices of the food sub-indices.

? October inflation likely lower as retail fuel prices ease. Given the persistent theme of higher retail fuel prices driving inflation, we believe that the flatter-to-slightly declining fuel price trajectory implies that inflation will likely flatten somewhat to around 4.0% for October.

? No reason to deviate from OPR trajectory. Given that higher inflation were a function of the volatile (and likely transitory) fuel component rather than underlying demand factors, we believe that there is little reason to move towards a tightening agenda in the MPC’s upcoming November meeting. This is further grounded by the slightly tapering core inflation, which somewhat tracks underlying demand.

3Q17 inflation lower despite sharp Sep17 inflation. September’s consumer price index (CPI) continued to accelerate to 4.3%. This represents a second consecutive month of growth since July’s seven-month low of 3.2%, bringing it to a five-month high. September’s numbers were spot on the consensus estimates (ranging from 3.8-4.6%) though it was just below the house estimates of 4.4%. Nevertheless, with a more subdued inflation observed during Jun-Jul17, September’s numbers rounds up 3Q17 inflation at a slightly lower 3.8% (2Q17: 4.0%), the second consecutive quarter of easing inflation since its peak of 4.3% in 1Q17.

On a MoM basis, the CPI was flattish with a mere 0.3% growth (Aug: 0.9%). On a seasonally-adjusted basis, the CPI inflation likewise rose by the same amount.

Core inflation stabilises. Underlying inflation, as measured by core inflation, grew by a stable 2.4% YoY (Aug: 2.4%). This suggests that higher September inflation was likely due to transitory factors and volatile inflation elements, particularly fuel prices. Overall, September’s numbers brings the overall 3Q17 core inflation a step down to 2.5% (2Q17: 2.6%).

Dearer fuel prices keep transportation inflation high. The transportation index (comprising 13.7% of the headline CPI) continued to accelerate, rising by 15.8% (Aug: 11.7%), persisting in double-digit zone on higher retail fuel prices. This was the second consecutive month of higher fuel prices. September’s transportation inflation was well within our estimates during our previous report, which anticipates higher transportation inflation at the 15.0-16.0% range. On a MoM basis, the transportation index was likewise higher, albeit rising by a smaller quantum of 2.0% (Aug: 4.6%), again reflecting the slowing growth in retail fuel prices.

More gradual price increase at the pump. The smaller MoM increase in the transportation index is consistent with growth in prices of RON95, RON97 and diesel halved relative to August. The weighted average retail prices for RON95, RON97 and diesel were at RM2.188/litre, RM2.482/litre and RM2.088/litre respectively (Aug: RM2.118/litre, RM2.387/litre and RM2.037/litre respectively). Retail fuel prices peaked during the second and third week of September though consumers subsequently saw a mild reprieve with retail fuel prices mostly lower during the remaining two weeks of September (with the exception of diesel prices which rose two cents during the week starting 28 Sept). Interestingly, retail fuel prices were a departure from the trajectory of global oil prices which increased by a greater quantum during September. Brent crude oil prices and Tapis oil grew by 22.3% and 23.5% respectively in September to USD57.54/barrel and USD58.1/barrel respectively (Aug: USD52.38/barrel and USD 50.94/barrel).

Food inflation accelerates on base effect. The food and non-alcoholic beverages index (comprising 30.2% of headline CPI) grew by a faster 4.6% (Aug: 4.3%), accelerating for the second consecutive month. On a MoM basis, however, food inflation was flat (Aug: +0.4%) suggesting low base effects of 2016 jacking up inflation. Overall, inflation was broadly unchanged across most food categories. Notably, the milk and eggs, vegetable and fruits subcomponents seeing faster inflation while other categories including fish and seafood, rice, bread and other cereal, and meat seeing slower inflation during September.

Global food inflation flattening. The Food and Agriculture Organisation (FAO) Food Price Index was only slightly higher, growing by just 0.8% MoM in September (Aug: -1.2%). Higher prices of vegetable oil, particularly palm oil and, to a certain extent, soy oil factored into higher world food prices, given lower than expected palm oil production in Southeast Asia. Dairy prices also factored someone into the higher world food price index, stemming from supply issues in the Oceania and European Union along with robust demand for butter and cheese in Asia.

Housing, water, electricity, gas and fuel prices flat. The housing water, electricity, gas and fuel index (comprising 23.8% of headline CPI) grew by a stable 2.4% YoY (Aug: 2.4%). The sub-index stabilised after rising 0.6% MoM in August.

Global inflation takes a breather. After showing signs of advancing in August, global inflation was overall stable. Headline inflation in the Eurozone were unchanged at 1.5% though core inflation slowed marginally to 1.1%, dropping 0.1 ppts. In the US, inflation surged to 2.2%, largely from higher gasoline prices following hurricane-related factors disrupting oil productions. However, notwithstanding higher inflation, US core consumer price inflation rose by 1.7% for the fifth consecutive month, offering Fed doves a platform to argue against a third interest rate hike for 2017. Moving closer to home, inflation to Japan was encouragingly higher at 0.7% in August (Jul: 0.4%), possibly inching towards the Bank of Japan’s 2% target in the medium term.

Source: Kenanga Research - 23 Oct 2017