● Headline inflation increased slightly to 1.0% YoY in December from 0.9% in November, matching market expectation (consensus: 1.0%; KIBB forecast: 1.2%)

- The average 2019 CPI settled at 0.7% YoY (2018: 1.0%) in line with house forecast.

 - Low inflation in 2019 was attributable to the lapse in the impact of consumption tax policy, low price ceiling imposed on domestic fuel prices, lingering effect of the adjustment in the retail oil pricing mechanism, as well as lacklustre demand-pull pressure as economic growth continue to slow to an estimated 4.5% (2018: 4.7%).

- MoM: inched up marginally (0.2%; Nov: 0.1%).

- QoQ: moderated despite a low base effect in the preceding year (1.0%; 3Q19: 1.3%)

- Core inflation: sustained at a three-month low (1.4%; Nov: 1.4%).

● Higher growth in prices led by the index of food & non-alcoholic beverages

- Food & non-alcoholic beverages (1.7%; Nov: 1.5%): edged up due to higher prices of food away from home (2.5%; Nov: 2.2%), reflecting year-end festive demand.

- Transport (-1.9%; Nov: -2.4%): continue to fall for 14 straight months, albeit at a slower pace on the back of government low price ceiling measures.

● Rising inflationary pressure across most advanced and developing economies

- Eurozone (1.3%): second month of expansion, led by higher cost of services and food, alcohol & tobacco.

- Thailand (0.9%): edged higher but remained below the Bank of Thailand's target range for a seventh straight month.

- China (4.5%): steadied for two straight months to near 8-year high fuelled by a surge in pork prices as African swine fever continued to disrupt local pork supply.

● 2020 CPI forecast between 1.0% to 1.5% (2019: 0.7%)

- Inflationary pressure is expected to remain benign in 2020 (1.0-1.5%; 2019: 0.7%) in the absence of demand-pull factor amid slowing growth momentum. The highly anticipated gradual floating of fuel prices (though recently postponed), planned nationwide upward adjustment in water tariffs and low base effects would add some pressure to inflation.

- The expectation of rising inflation is a cost-push factor rather than a demand-pull factor. Meanwhile, the recent outbreak of Coronavirus in China, a cousin of the SARS virus, may adversely impact the domestic economy in the upcoming month. Coupled with the soft growth momentum as evidenced by the recent slew of weak economic indicators (e.g. exports, distributive trade sales, industrial production), we reckon that the BNM may still have room to slash the Overnight Policy Rate (OPR) by another 25 basis points after it just made a fresh cut of 25bps to 2.75% yesterday.

Source: Kenanga Research - 23 Jan 2020