● The headline inflation eased to 4.4% in May, below expectation (KIBB: 4.7%; consensus: 4.7%; Apr: 4.7%)

• Attributable to subdued domestic demand due to the imposition of the Movement Control Order (MCO) 3.0 and tightened MCO 3.0 in May. To add, the lower inflation was due to cheaper food prices as 12 food items were placed under the price control scheme for Hari Raya Aidilfitri celebration.
   
• MoM: muted inflationary pressure (0.0%; Apr: 0.2%).
   
• Core inflation: growth edged up marginally (0.8%; Apr: 0.7%).

● Softer growth in prices led by the indices of food and nonalcoholic beverages and transport

• Food and non-alcoholic beverage (1.5%; Apr: 1.9%): moderated to a two-month low, mainly due to cheaper prices for food at home (1.5%; Apr: 2.3%), especially meat (1.3%; Apr: 3.9%) and vegetables (0.4%; Apr: 2.7%).
   
• Transport (26.0%; Apr: 27.0%): eased marginally but continued to register a MoM uptick (0.2%; Apr: 0.1%), driven by a monthly increase of 2.0% in the retail price of RON97. Note that the government still retained the ceiling price for RON95 and diesel at RM2.05 and RM2.15 per litre respectively since mid-February.
   
• Housing, water, electricity, gas & other fuels (3.2%; Apr: 3.1%): edged up to the highest since December 2014, primarily reflecting the lower base of last year due to the 2020 electricity bill discounts.

● Rising inflation across advanced and developing countries as economies begin to reopen

• US (5.0%): surged to a near 13-year high due to a sharp increase in prices of used cars and trucks.
   
• Eurozone (2.0%): climbed to the highest level since October 2018 on higher energy prices and stronger demand for goods and services due to the easing of Europe's COVID-19 restriction measures.
   
• China (1.3%): rose to an eight-month high, driven by an increase in food prices due to the scarcity of eggs and freshwater fish, and elevated transportation costs due to the rising global crude oil prices.

● 2021 CPI forecast retained at 1.8% (2020: -1.2%) as the COVID-19 risk remains elevated

• The enforcement of the full-scale MCO in June is expected to continue to dent domestic demand and alleviate upward pressure on prices. Moving forward, as the base effects begin to dissipate, the headline inflation should settle between the range of 1.5% to 2.5% in the 2H21. However, once the economy began to reopen when the COVID-19 situation improves, probably in the 4Q21, prices may begin to rise again as demand returns.
   
• At this juncture, we expect the BNM to keep the OPR unchanged at 1.75% at the next Monetary Policy Committee meeting in early July and for the rest of 2021. However, if the current full-scale MCO is prolonged beyond July, severely affecting the economic growth recovery, it may raise the probability of another 25 bps rate cut.

Source: Kenanga Research - 28 Jun 2021