● Headline inflation continued to fall at a steady rate (-1.4%; Aug: - 1.4%), below expectation (KIBB: -1.0%; consensus: -1.3%)
− Although the demand condition has improved, due to the resumption of most economic activities, inflation remains capped by weak energy prices and continued electricity bill discounts.
− MoM: muted inflationary pressure (0.0%; Aug: 0.2%).
− 3Q20: fell at a slower rate (-1.4%; 2Q20: -2.6%).
− Core inflation: edged down to a 16-month low (1.0%; Aug: 1.1%)

● Weak transport prices and lower housing, water, electricity, gas & other fuels costs masked higher food prices

− Food and non-alcoholic beverages (1.4%; Aug: 1.3%): improved marginally on a lower base effect.
− Transport (-9.9%; Aug: -9.9%): growth contraction remained unchanged, despite weaker global crude oil price (-32.6% YoY to USD41/bbl; Aug: -25.1% to USD45/bbl).
− Housing, water, electricity, gas & other fuels (-3.0%: Aug: -3.0%): weak prices persisted, resulting from a higher base and continued electricity bill discounts.
− Meanwhile, recreation services and culture index (0.1%; Aug: 0.6%) and miscellaneous index (2.7%; Aug: 3.1%) moderated.

● Mixed inflation trend across most advanced and developing economies
− China (1.7%): inflation slowed to its lowest level in 19 months, as food prices continue to moderate.
− US (1.4%): fourth straight month of rising inflation, supported by a rise of used car prices.
− Thailand (-0.7%): deflation edged lower, weighed by a drop in energy prices and lower raw food prices.

● 2020 CPI forecast retained at -0.7% (YTD: -1.0%; 2019: 0.7%) as the improving pace of economic recovery is expected to ease the lingering deflationary environment
− Deflation is expected to remain for the rest of the year, resulting from persistently high levels of unemployment, income instability, weakening crude oil prices and fears of a resurgence in local COVID-19 cases, which has prompted new Conditional Movement Control Order (CMCO) restrictions. Yet, the deflationary trend may marginally ease in the coming months with support from additional fiscal stimulus measures and continued improvement in demand condition driven by the upcoming festive season.
− Bank Negara Malaysia (BNM) is expected to maintain the Overnight Policy Rate (OPR) at 1.75% for the remainder of the year. However, should the current resurgence of COVID-19 infections lead to more restrictive lockdown measures, we believe that BNM has room to embark on another rate cut at its November Monetary Policy Committee meeting.

Source: Kenanga Research - 22 Oct 2020