OVERVIEW

● Headline inflation growth unchanged at 0.2% YoY in April, a tad below consensus and house estimate of 0.4% and 0.5%, respectively. On a MoM basis, the index was unchanged. On a similar direction, the core inflation grew by 0.1% YoY, lower than the rate observed in the preceding month (Mar: 0.3%) emanating from the changes in retail oil pricing mechanism at the start of 2019, as well as the lack of demand-pull pressure.

● Higher prices in food, housing, water, electricity, gas & other fuels offset declined in transport prices. The food index growth was unchanged at 1.1% YoY but it continued to fall on MoM basis by 0.2% (Mar: -0.5%). Similarly, housing water, electricity, gas & other fuels recorded a steady growth of 2.0% YoY, its fifth straight month. Additionally, transport index contracted by 2.6% (Mar: -3.0%), as RON-95 continued to fall by 5.5% (Mar: - 5.4%), while RON-97 prices trended up, rising by 9.5% (Mar: +1.9%) the highest in six months. This mirrored the average rise of Brent crude oil price (Apr: USD72.8/barrel Vs. Mar: USD68.4) which rallied to its highest in six months following Trump’s decision to further impose sanction on Iran’s energy industry while other top producers faced output disruptions. In the next few months, we expect inflationary pressure to gradually pick up, driven by firmer global oil prices and the effect of seasonally inflationary pressure during the fasting month that culminate into the Eid celebration which invariably push up demand for food and consumer goods. Meanwhile, the recent Bank Negara Malaysia (BNM) overnight policy rate (OPR) cut of 25 basis points is expected to stimulate some spending in the economy but may not be enough to lift up pressure on inflation primarily because of the low ceiling on domestic retail fuel prices and the overall slowdown of economic activity.

● Headline inflation picked up across most advanced and developing economies on high energy prices, but underlying inflationary pressure remained muted. US inflation increased to the highest level in five months, it rose by 2.0% propelled by rising energy prices, while the core index expanded to 2.1% matching market expectations. However, the personal consumption expenditure (PCE) price index, the Fed’s favourite inflation gauge which due this 30th May is expected to remain unchanged at 1.7% supporting the market projection of no further rate hikes this year. In the Eurozone, headline and core inflation rose to 1.7% and 1.4% respectively, providing some relief to the European Central Banks’s (ECB) as inflation remaining well below its 2.0% target. Within Asia, inflation in Japan edged up to 0.9% in April, lifted by pricier energy and utilities but remained well below the Bank of Japan’s 2.0% target. Meanwhile, China experienced a 6-month high inflation, driven mainly by the supply-side disruption, particularly to a spike in pork prices, which has been hit by the African swine fever in recent months.

● Overall for this year, we foresee that the floating of domestic fuel prices, slated for July, and low base effect arising from the changes in consumption tax to technically lift YoY inflation in the 2H19, while the underlying inflation is expected to remain stable. However, we expect any upside risk would be limited mostly due to heightened risks emanating from the external front, namely the slowdown in global growth and the escalating trade dispute between the US and China. The impact may spread to the domestic front, which is likely to hinder economic activity, particularly in the trade and investment sector. Against this backdrop, we believe that inflation would likely hit the lower end of our forecast range of 1.0-1.5% in 2019 (2018: 1.0%) while BNM to stay put this year after the recent OPR cut.

Source: Kenanga Research - 27 May 2019