Overview

? October’s inflation eases from September’s aberration. October’s consumer price index (CPI) kicked off 4Q17 with a softer inflation of 3.7%, retreating from September’s five-month high of 4.3% (3Q17: 3.8%). Core inflation, moderated to 2.3%, its lowest since Jan17, suggesting that September’s inflation was likely an aberration from the trend.

? Cutting the fat from food inflation. The food and non-alcoholic beverages index saw a slightly slower growth of 4.4% (Sep: 4.6%). This came as oil and fats subindex saw sharply lower inflation of just 16.2% (Sep: 39.6%), largely from a more moderate increase in cooking oil prices.

? Higher base effect. The higher base effect is salient on the transportation index, growing at a slower rate of 12.1% (Sep: 15.6%) in spite of overall higher retail fuel prices. Easing YoY growth is consistent with the slight decline in RON95 and RON97 prices, despite the continued increase in diesel prices.

? November’s inflation to continue on a downtrend trend. Moving into November, we expect the higher base effect to ease CPI growth further to around 3.5%. With inflation continuing to be softer in 4Q17, we may see annual inflation slightly lower at 3.9-4.0%, compared to our previous forecast of 4.1%.

? One OPR hike to be pencilled in; constellation of factors to be considered. The narrative for monetary policy has altered to the when and how much a rate hike rather than if it would occur. We would put a higher probability for a rate hike to happen in 1Q18. While growth is supportive of a rate hike, low core inflation may weigh against the case for a speedy or a bigger rate hike.

A more moderate October’s inflation. October’s consumer price index (CPI) kicked off the fourth quarter with a significantly softer inflation of 3.7%, retreating from September’s five-month high of 4.3% (3Q17: 3.8%). October’s inflation rate was just under the median consensus estimate of 4.1% (ranging from 3.8-4.4%) and the house estimate of 4.0%. On a MoM basis, the CPI fell by 0.2% (Sep: +0.3%) and was likewise so, on a seasonally adjusted basis.

Lower core inflation. Underlying inflation, as measured by core inflation, slowed to 2.3%, its lowest since Jan17. This reaffirms our previous comment that September’s inflation was likely bumped up by transitory factors and volatile inflation elements, including higher fuel prices. More importantly, October’s core inflation numbers suggest that despite the recently higher cost-push inflation and more buoyant 3Q17 GDP growth (at 6.2%), demand pressures on inflation appear to be mild, at best.

Passthrough effects from higher fuel prices weighs. The transportation index (comprising 13.7% of the headline CPI) continued to see double digit growth at 12.1% YoY (Sep: 15.6%) from overall higher retail fuel prices, well within our 8.0- 13.0% range forecasted in our previous report. However, as forecasted in our October report, the transportation index fell 0.2% on a MoM basis. This represented a mild moderation in MoM growth of overall retail fuel prices (for RON95 and RON97), breaking the two consecutive months of higher fuel prices in Aug-Sep notwithstanding higher diesel prices.

Gradual price increase at the pump. The marginal decline in the transportation index is consistent with the slight decline in RON95 and RON97 prices, despite the continued increase in diesel prices. The weighted average retail prices for RON95, RON97 and diesel were at RM2.177/litre, RM2.477/litre and RM2.126/litre respectively (Sep: RM2.188/litre, RM2.482/litre and RM2.088/litre respectively). While retail prices for RON95 and RON97 were higher by the end of October, consumers enjoyed a RM0.03/litre drop in prices and a mere RM0.01/litre price increase during the third and fourth week of October. It is noteworthy that this was another departure from the trajectory of global oil prices which saw significant increases across the board; Brent crude oil and Tapis oil grew by 27.1% and 28.2% respectively in October, breaching the USD60/barrel mark for the first time since Jun15 to USD61.37 and USD62.03 (Sep: USD57.54/barrel and USD58.10/barrel respectively).

Falling food inflation. The food and non-alcoholic beverages index (comprising 30.2% of headline CPI) saw a slightly slower growth of 4.4% YoY (Sep: 4.6%), breaking its two month streak of acceleration. On MoM, it fell 0.5% MoM (Sep: 0.0%); post-seasonal adjustment food prices likewise fell 0.3% (+0.2%). This came as oil and fats subindex saw sharply slower inflation of just 16.2% (Sep: 39.6%), largely from a more moderate increase in cooking oil prices. YoY inflation for fish and seafood also fell to 6.8% (Sep: +8.0%). Inflation of other food subindices was largely unchanged across other food categories though meat prices rose 3.2% (Aug: 0.4%).

Consistent with slower global food inflation. The Food and Agriculture (FAO) Food Price Index likewise saw MoM deflation of 1.3% (Sep: +0.8%). However, its constituent components differed somewhat from Malaysia’s food price index. While global prices of vegetable oils likewise declined (largely from higher-than-anticipated palm oil inventory levels in Malaysia amid a bumper soybean harvest in the US), the FAO reported decline in meat prices, though this is likely due to higher weightage of pork prices (which contributed to the decline in meat price index). The global food price index reported overall declines in most categories (i.e. vegetable oil, dairy prices, meat prices and sugar prices) with the exception of cereal prices (which saw a mild increase instead).

Housing, water, electricity, gas and fuel prices flat. The housing, water, electricity, gas and fuel index (comprising 23.8% of headline CPI) repeated September’s YoY (2.4%) and MoM (0.0%) performance respectively.

Global inflation mystery? Amid gathering chatter of a tightening agenda among monetary authorities in the global economies, inflation failed to impress in October, indeed, slipping a touch in many major economies. After relatively stable global inflation in September, inflation slipped somewhat across some advanced market economies. After a 2.2% surge in US inflation during September (largely from hurricanerelated factors), inflation eased to 2.0% in October. However, on a more encouraging note, core inflation picked up somewhat, rising 1.8% (Sep: +1.7%). Across the Atlantic, inflation in the Eurozone slipped to 1.4% (Sep: 1.5%). Closer to home, inflation in Japan was stable at 0.7% in September and likewise stable in Singapore and Thailand at 0.4% and 0.9% respectively in October.

Source: Kenanga Research - 27 Nov 2017