• CPI increase moderated slightly to 3.2% in July, from 3.6% in June

• Easing price pressures attributed to slowdown in Food and Transport indices

• Full-year, our inflation forecast is maintained at 3.5% in 2017

Highlights

In July, the Consumer Price Index eased further, recording a 3.2% y-o-y growth, against 3.6% in the preceding month.

Price pressures were driven by key items in the basket of goods, namely Transport (+7.7%), Food and Non-alcoholic Beverages (+4.2%) and Housing and Utilities (+2.2%) sectors.

YTD-July, CPI registered a 4.1% y-o-y growth compared to 2.4% in the corresponding period of the previous year.

Our comments

July’s inflation rate came in lower than the Bloomberg consensus estimate of 3.4%.

On a seasonally adjusted m-o-m basis, CPI contracted by 0.1% (Jun: -0.2%), suggesting easing of inflationary pressures.

Despite a robust y-o-y growth since February (avg: 14.8%), the Transport index has been contracting on a m-o-m basis for five consecutive months (Jul: -1.1% vs Jun: -2.4%). This indicates that the base effect may likely be wearing off, causing a moderation in index for the sector.

Looking ahead, CPI growth will likely still be on an expansionary trend but at a slower pace as the Transport sector index continues to moderate further.

In line with the guidance by Bank Negara in its 2Q17 Quarterly Bulletin, inflation is expected to continue easing in 2H17. Full year 2017 CPI growth is projected to average within 3.0% – 4.0%.

However, the overall inflationary trend still remains high, as the 3-month moving average is 3.6% in July, albeit lower than the previous month (June: +4.0%). Therefore, we maintain our 2017 inflation forecast at 3.5% (2016: +2.1%).

Since the rising price pressures were caused by cost factors and not demand factors, we believe Bank Negara Malaysia will likely maintain an accommodative monetary policy and keep OPR at 3.0% throughout 2017.

On GDP, we reiterate our recently upgraded 2017 full-year GDP forecast at 5.2% (2016: +4.2%), in view of a higher-than-expected growth of 5.7% in 1H17.

Source: Alliance Research - 23 Aug 2017