OVERVIEW

● Headline inflation eased to a three-month low of 0.2% YoY in November (Oct: 0.6%), registering below the consensus and house estimates of 0.5% and 0.8%, respectively. On MoM basis, the index was sustained at 0.2%. Meanwhile, the core inflation was slightly up by 0.5% YoY (Oct: 0.4%). The inflation growth has remained mild since August, in part due to the tax holiday period following the abolishment of the Goods & Services Tax (GST) since June, the reintroduction of the fuel subsidy and the high base effect.

● The lower CPI growth was largely attributed to the increasingly muted impact of the Sales and Services Tax (SST) since its implementation in September. In addition, the higher base effect a year ago mainly in the index of transport and communication had also influenced the CPI growth outcome. The transport index fell 2.3% (Oct: +0.8%) while communication dropped 1.3% (Oct: -1.5%). The impact of ongoing monsoon season on domestic food supply was relatively minimal as reflected in the lower food sub-group indices of vegetables (0.8% YoY; Oct: 3.0%) and fish and seafood (0.5% YoY; Oct: 0.8%). The above factors outweighed a relatively steep increase observed in prices of alcoholic beverages & tobacco (Nov: 1.0% YoY; Oct: -0.8%), as retail prices of cigarettes were increased in adhering to the Control of Tobacco Product Regulations 2004, which requires all prices of tobacco products to be raised after the fixation of 10.0% SST.

● Moderating inflation in the advanced and regional economies. In the US, inflation eased to 2.2% (Oct: 2.5%), dragged by lower energy and fuel prices, masking higher prices of food, rent and medical care. Nevertheless, both headline and core inflation (2.2%; Oct: 2.1%) measures remained above Fed’s 2.0% inflation target, partly supporting Fed’s decision to hike interest rate by another 25 basis points at its December FOMC meeting, yesterday. Meanwhile, inflation in the Eurozone edged lower to 1.9% (Oct: 2.2%), driven by weaker energy and food prices. Similarly, China and Thailand registered softer inflation due to slower pace of increase in food prices in China and a sharp slowdown in the transport inflation which more than offset higher food prices in Thailand. Meanwhile, Indonesia inflation increased marginally to 3.23% (Oct: 3.16%), underpinned by rising prices of food products and airfares.

● In the final month of 2018, we expect inflation to taper off and remain below 1.0% as the upward pressure arising from year-end festive demand, weak MYR and seasonal monsoon period will be offset by fuel subsidies, particularly as RON95 price remains fixed at RM2.20, and the high base effect from the previous year. On a year-to-date basis, the CPI has moderated to 1.0% compared to 3.8% in the same period a year ago. As such, we expect 2018 CPI growth to hit the lower end of our forecast range of 1.0-1.5% (2017: 3.8%). For 2019, floating of domestic fuel prices in 2Q19, albeit announced to be implemented gradually, and low base effect arising from the tax holiday period in June to August 2018 may exert upward pressure to inflation. However, prospects of a moderation in global growth and lower crude oil prices would limit inflation growth. Against this backdrop, CPI is projected to only increase modestly, within a range of 1.0-1.5% in 2019, while Bank Negara Malaysia is expected to hold the overnight policy rate steady at 3.25% next year, to ensure price stability and to support economic growth

Source: Kenanga Research - 20 Dec 2018