● Headline inflation slipped deeper into negative territory in October (-1.5%; Sep: -1.4%), below expectation (KIBB: -1.2%; consensus: -1.4%), partly due to a high base effect

− Prices continued to remain under pressure on weaker consumer spending due to the reimplementation of Conditional Movement Control Order (CMCO) in high-risk states on Oct 14th, coupled with cheaper global oil prices and electricity bill discounts.

− MoM: growth inched up marginally (0.1%; Sep: 0.0%), driven by a rebound in food prices (0.1%; Sep: -0.1).

− Core inflation: softest growth in 17 months (0.8%; Sep: 1.0%), reflecting a broader weakness in consumer demand.

● Steeper YoY decline in transport prices, and weak housing, water, electricity, gas & other fuels costs outweighed a rise in food prices

− Transport (-10.2%; Sep -9.9%): growth contraction edged lower, on the back of falling global crude oil prices (-37.8% YoY to USD37.5/bbl; Sep: -32.6% to USD41.0/bbl).

− Housing, water, electricity, gas & other fuels (-3.0%; Sep: -3.0%): fell at the same rate for the third straight month, due to continued electricity bill discounts.

− Food and non-alcoholic beverages (1.5%; Sep: 1.4%): expansion marginally improved to a four-month high, supported by an increase in prices of food at home (1.4%; Sep: 1.2%), whilst food away from home moderated to 1.8% (Sep: 1.9%).

● Slower inflation growth across most advanced and developing economies

− China (0.5%): inflation growth continued to fall, reaching its lowest level in 11 years, due to plummeting food prices.

− US (1.2%): inflation moderated as falling prices of fuel, clothing, car insurance, and medical care outweighed rising food prices and electricity costs.

− Japan (-0.4%): fell into deflationary territory for the first time in four years, due to a high base effect and a recent government campaign to encourage tourism.

● 2020 CPI forecast revised down to -1.0% from -0.7% (YTD: -1.1%; 2019: 0.7%) on the back of renewed deflationary threat amid worsening COVID-19 situation

− The government’s decision to reimpose the CMCO in most of the states in Malaysia to prevent the COVID-19 situation from becoming worse may likely hurt consumer spending in the near term. However, rising commodity prices especially oil due to vaccine hopes may help to partially reduce deflationary pressures in the coming months.

− With the continuing surge in local COVID-19 infections and the extension of CMCO measures, we assign a 50% probability that Bank Negara Malaysia (BNM) will cut rates by 25bps at the next Monetary Policy Committee meeting in January.

Source: Kenanga Research - 26 Nov 2020