• Headline inflation remained unchanged at 2.0% YoY in July for the third consecutive month, slightly above house forecast and market consensus of 2.1%, largely due to a sharper-than- expected slowdown in food inflation
  
  − Despite a continued increase in transport cost, driven byhigher average diesel price in July, and rising restaurant &accommodation services cost due to robust tourism activity,inflation remained flat amid a decline in food at home prices.
  
  − On a MoM basis, headline inflation slowed to a four-month lowof 0.08% (Jun: 0.15%), primarily due to muted housing costs(0.0%) and a moderation in food prices (0.1%; Jun: 0.3%).
  
  − Despite higher core food prices (0.5% MoM; Jun: 0.0%), coreinflation remained unchanged at 0.1% MoM or 1.9% YoY.

• The continued rise in transport, restaurant & hotel and miscellaneous costs, balanced the moderation in food prices
  
  − Food & non-alcoholic beverages (1.6%; Jun: 2.0%): moderated to its lowest level in nearly three years, as prices of foodat home dropped by 0.5% MoM (Jun: 0.5%), driven by a sharp decline in the price index of meat (-1.8% MoM; Jun: 0.8%)and vegetables (-5.5% MoM; Jun: 1.7%).
  
  − Transport (1.2%; Jun: 1.2%): remained unchanged, though the cost of operating personal transport equipment trendedhigher (1.8%; Jun: 1.7%) amid a 22.6% increase (Jun: 15.8%) in diesel costs and a 1.2% rise (Jun: 0.9%) in fuels &lubricants prices.
  
  − Restaurant & hotel (3.4%; Jun: 3.3%): rose slightly to a three-month high, primarily due to a 0.8% MoM increase in hotelcosts (Jun: 0.3%), partly driven by robust tourism activity, especially given the burgeoning durian tourism trend.

• Inflationary trends across economies remain mixed; the Fed likely to cut policy rate by 25 bps in September
  
  − US (2.9%; Jun: 3.0%): moderated below 3.0% for the first time since March 2021, driven by declining apparel and transportation costs. However, persistently high housing costs have dampened expectations for a 50 bps rate cut inSeptember, now scaled back to 25 bps.
  
  − EU (2.6%; Jun: 2.5%): higher-than-expected, with services inflation remaining elevated at 4.0% YoY. Rising wagepressures pose a significant inflationary risk, potentially delaying the ECB's expected rate cut in September.
  
  − China (0.5%; Jun: 0.2%): edged up to a five-month high, largely due to a 1.2% MoM increase in food prices. While inflationmay rise slightly in the coming months, weak macro conditions are likely to keep monetary easing on the table.

• 2024 headline CPI forecast maintained at 2.2% (2023: 2.5%), reflecting limited upward pressure on prices
  
  − While inflation is expected to rise in the coming months, this is largely due to base effects. Pressures are anticipated fromthe pass-through effects of diesel subsidy rationalisation, increased consumer spending following the withdrawal of EPF’sflexible account (transfer deadline: August 31), and higher costs of imported goods driven by geopolitical and climatecrises. However, these are likely to be tempered by the ongoing strengthening of the ringgit. To highlight, the introductionof the progressive wage policy in October, alongside a planned civil servant salary increase in December (Phase 1: 4.0-8.0%), could push inflation higher in 1H25.
  
  − Bank Negara Malaysia (BNM) is expected to keep the overnight policy rate at 3.00% for the next 12-15 months, given thelimited upside risk to inflation in the near term. While inflation may spike in 2H25, potentially due to the floating of RON95in July next year, this could be offset by weaker external demand, allowing BNM to hold rates steady.

Source: Kenanga Research - 23 Aug 2024