● Headline inflation fell at a slightly faster pace in August (-1.4% YoY; Jul: -1.3%), below expectation (consensus: -1.3%; KIBB estimate: -1.2%), partly due to a high base effect

- While economic activities have mostly resumed under the Recovery Movement Control Order, leading to an improved demand condition, prices remained capped by the elevated unemployment level and electricity bill discounts.

- MoM: eased to a four-month low (0.2%; Jul: 0.7%) on moderation in the rise of transport cost (0.4%; Jul: 4.9%).

- Core inflation: remained at its softest growth in 15 months (1.1%; Jul: 1.1%).

● Steeper YoY decline in electricity costs masked a softer drop in transport prices

- Housing, water, electricity, gas & other fuels (-3.0%; Jul: -2.6%): registered a fresh record low due to a higher base and continued electricity bill discount.

- Transport (-9.9%; Jul: -10.3%): smallest drop in five months, tracking the improvement in global crude oil price (-25.1% YoY to USD45/bbl; Jul: -33.6% to USD43/bbl).

● Mixed inflation growth across advanced and developing economies, with the Eurozone falling into deflation

- Eurozone (-0.2%): first deflation in 4 years, weighed down by deflating energy prices and weak industrial goods prices.

- US (1.3%): third consecutive month of rising inflation, driven by the sharpest monthly gain of used car prices (5.4%) since 1969.

- China (2.4%): inflation moderated slightly, as rising food prices were tempered by a slowdown in the surging price of pork.

● 2020 CPI forecast maintained at -0.7% (YTD: -1.0%; 2019: 0.7%), with a gradual ease in deflation pencilled in for the remainder of the year as the pace of economic recovery gradually picks up

- Prices would gain support from the injection of additional stimulus measures (KITA PRIHATIN) worth RM10.0b targeted at bolstering domestic demand of the B40, M40, employees and SMEs. However, deflation will likely remain till year end amid surging unemployment, limited upside to crude oil price and lingering COVID-19 fears.

- Barring a nationwide 2nd wave of COVID-19 infections and reinstatement of lockdown measures, BNM is expected to keep the OPR unchanged at 1.75% for the rest of 2020 in line with relatively upbeat tone derived from its latest monetary policy statement.

Source: Kenanga Research - 24 Sept 2020