● The headline inflation leaped to 4.7% in April, the highest reading since March 2017, slightly below expectation (KIBB: 4.8%; consensus: 4.9%; Mar: 1.7%)

- The sharp increase mainly reflected a substantial rebound in the transport component due to last year’s crude oil price slump. To add, improved demand conditions as most states were placed under the lenient Recovery Movement Control Order (RMCO) in April has helped to drive the CPI higher.

- MoM: softened marginally (0.2%; Mar: 0.3%).

- Core inflation: remained unchanged for the sixth straight month at 0.7%.

● The higher growth in the inflation rate was propelled mainly by a significant increase in fuel prices and a rise in food prices

- Transport (27.0%; Mar: 9.8%): surged to a record high, driven by a notable YoY increase of 60.8% and 61.9% in the retail price of RON95 and RON97 respectively, in line with a triple-digit YoY growth of 166.1% in Brent crude oil price.

- Food and non-alcoholic beverage (1.9%; Mar: 1.5%): soared to a 19-month high, mainly due to higher demand for food at home (2.3%; Mar: 1.6%), especially fresh meat and fish. It also coincides with the fasting month of Ramadhan.

- Housing, water, electricity, gas & other fuels (3.1%; Mar: -0.8%): rebounded sharply due to last year’s electricity bill discounts given to all consumers as part of the government’s economic stimulus package.

● Rising inflation across advanced and developing economies amid rising commodity prices

- US (4.2%): soared to the highest level since September 2008 due to supply constraints as the economy began to reopen.

- Eurozone (1.6%): jumped to a 2-year high on higher fuel and electricity costs, as well as increased spending in the services sector on the back of a vaccine-fuelled optimism.

- China (0.9%): second straight month of expansion on strong domestic demand, but still remained below the PBoC target of 3.0%.

● Despite the current inflationary environment, we maintain our 2021 headline inflation forecast at 1.8% (2020: -1.2%) due to a strong headwind arising from Malaysia’s worsening COVID-19 situation

- The current spike in the inflation rate was mainly due to a short-term low base effect from last year that will soon ease as we enter 2H21. Moving forward, rising global oil and commodity prices are expected to continue to drive the inflation higher. However, the rapid rise in both domestic and global COVID-19 cases coupled with the nationwide MCO 3.0 may exert downward pressure on prices.

- For the time being, we expect the BNM to maintain a status quo on the monetary policy front. However, as local COVID- 19 cases and deaths continue to set daily records, we now see a higher probability of another rate cut by the BNM, especially if the government impose a stricter SOPs similar to MCO 1.0.

Source: Kenanga Research - 24 May 2021