• The headline inflation edged-down to a 30-month low of 1.9% in September (Aug: 2.0%), below house forecast and market consensus of 2.1%
  
  − It fell below its 10-year average of 2.0% due to muted MoM inflationary pressure in two of the largest price components, rent (18.1%) and transport (14.6%). On a monthly basis, CPI slowed to 0.08% (Aug: 0.15%), partly due to deflation recorded in recreation services & culture (4.8%) and health (1.9%).
  
  − On the other hand, core CPI remained elevated at 2.5%, above its long-term average of 1.8%. This component increased by 0.3% MoM (Aug: 0.2%), primarily due to rising core food prices attributed to the increasing cost of imported inflation caused by the weaker ringgit.

• Broad-based moderation led by cheaper key food items
  
  − Food & non-alcoholic beverages (3.9%; Aug: 4.1%): eased for the seventh consecutive month to its lowest level in 19 months, primarily due to continued MoM deflation in the food at home subcomponent. This is driven mainly by lower prices for fresh meat, fish and seafood. However, it is worth noting that rice price has soared to 5.0% YoY (Aug: 3.0%), its fastest pace of increase since the 2007-2008 food price crisis.
  
  − Housing, water, electricity, gas & other fuels (1.6%; Aug: 1.6%): remained unchanged at an eight-month low. On a MoM basis, inflationary pressure was muted (Aug: 0.3%), as a moderate increase in the cost of maintenance and repair of residence was offset by lower electricity costs.
  
  − Transport (-0.1%; Aug: 0.0%): recorded its second deflation in 31 months. Of note, despite higher Brent crude oil price, the component continued to record zero inflation, partly due to a decline in the cost of air transport (-3.8%; Aug: 7.2%).

• Mixed inflation trend across advanced and developing economies; upside risks to prices remain on fore
  
  − US (3.7%; Aug: 3.7%): remained unchanged but exceeded consensus (3.6%) due to a sharp increase in shelter costs (0.6% MoM; Aug: 0.4%). However, the core CPI met expectation and trended lower to 4.1% (Aug: 4.3%), which strengthens the case that the Fed has already reached its peak interest rate.
  
  − Japan (3.0%; Aug: 3.2%): eased due to government subsidies on electricity and gas prices and although core prices also slowed to 2.8% (Aug: 3.1%), it is slightly above the consensus of 2.7%. This was mainly due to the ongoing robust consumer spending and rising food costs amid a weak yen.
  
  − China (0.0%; Aug: 0.1%): fell to the brink of a deflation again, primarily due to weak domestic spending and cheaper food prices (especially pork and vegetables). This situation calls for further stimulus and policy support to boost consumption.

• 2023 headline inflation forecast retained at 2.9% (2022: 3.3%) due to renewed inflationary pressures
  
  − Headline inflation currently averages 2.8% year-to-date and is expected to remain in the range of 1.7-1.9% in the upcoming months. This could potentially lead to a full-year CPI average of around 2.7%, slightly lower than our current forecast of 2.9%. However, the recent increase in global commodity prices, a weakened ringgit, heightened geopolitical tensions, India's ban on sugar exports and extreme weather conditions may exert additional upward pressure on inflation in 4Q23.
  
  − Even though we are currently entering a period of heightened uncertaintites, the BNM is still expcted to keep the overnight policy rate unchanged at 3.00% until end-2024 due to a stable price outlook and a moderating growth momentum.

Source: Kenanga Research - 23 Oct 2023