● The headline inflation slowed to an almost two-year low of 2.0% in July (Jun: 2.4%), slightly below the consensus and house forecast of 2.1%

- The continued deceleration in price pressures was mainly attributable to a MoM deflation recorded in three components, namely miscellaneous goods & services (weight: 6.7%), communication (4.8%) and recreation services & culture (4.8%). Despite a 0.4% increase in food inflation, CPI marginally eased to 0.08% MoM (Jun: 0.15%).

- Similarly, core inflation cooled further to a 14-month low of 2.8% YoY (Jun: 3.1%). The core component experienced muted inflationary pressure on a MoM basis (Jun: 0.2%).

● Broad-based slowdown, driven mainly by transport, communication and recreation services & culture indices

- Transport (-0.4%; Jun: 0.0%): fell into a deflation for the first time since February 2021, driven by cheaper air fares (2.7%; Jun: 11.4%) and lower cost of operating personal transport equipment (-0.8%; Jun: -0.6%).

- Communication (-3.7%; Jun: -3.6%): growth contraction edged lower, on the back of falling telephone & telefax equipment prices (-1.0; Jun: -0.7%) amid mid-year and July 7 sales.

- Recreation services & culture (1.1%; Jun: 1.6%): eased to a 16-month low, primarily due to cheaper entertainment costs (1.0%; Jun: 1.8%) and a continued drop in prices of audio-visual, photographic and information processing equipment (- 2.3%; Jun: -1.7%).

- Food & non-alcoholic beverages (4.4%; Jun: 4.7%): eased to its lowest level in 15 months due to a moderation in prices of food at home (3.0%; Jun: 3.2%) and food away from home (6.2%; Jun: 6.8%). However, on a MoM basis, food inflation increased by 0.4% (Jun: 0.1%) due to higher fruits (0.4%; Jun: 0.1%) and vegetables (0.7%; Jun: 0.1%) prices.

● Weak inflationary pressure across advanced and developing economies amid subdued demand

- US (3.2%; Jun: 3.0%): edged up marginally due to the base effect, but core CPI trended lower to 4.7% YoY (Jun: 4.8%), primarily due to easing prices of used vehicles and electronics. However, persistent inflationary pressures in the services sector amid solid wage gains adds to the uncertainty of the Fed's monetary policy outlook.

- Korea (2.3%; Jun: 2.7%): eased further to its lowest level in more than two years due to a fall in transportation costs. However, as risks to inflation remain elevated, the Bank of Korea may likely maintain its hawkish stance.

- China (-0.3%; Jun: 0.0%): turned negative, recording its first YoY deflation in 29 months. However, on a MoM basis, CPI increased by 0.2% MoM (Jun: -0.2%), marking the end of five straight months of deflation. This increase is partly due to People Bank of China's reduction of its key short-term policy rates in June.

● 2023 headline inflation forecast retained at 2.9% (2022: 3.3%) amid growing uncertainties over prices

- Despite signs of growing disinflationary pressure due to relatively weak consumer demand and a global economic slowdown, the potential for a pick-up in commodity prices, extreme weather conditions, the collapse of the Black Sea deal, and India's bans on sugar and rice exports could lead to higher food and transport costs in the next three to nine months. These upside risks to prices might offset the disinflation on the supply side, pushing up inflation to around 2.6% in 2H23.

- As inflation is still expected to fall on the lower end of the BNM's forecast range of 2.8 - 3.8% in 2023, the central bank is expected to maintain status quo and keep the overnight policy rate unchanged at 3.00%.

Source: Kenanga Research - 28 Aug 2023