CPI normalises in January

• CPI expanded by 2.7% in January, slower than +3.5% in December
• For a start, inter-regional indices were unveiled: Urban Inflation up 2.8% and Rural Inflation rose 2.5%
• Full-year, we forecast inflation to expand between 3.0%-3.5% in 2018

Highlights

In January, the Consumer Price Index rose 2.7% y-o-y, from an expansion of 3.5% in the preceding month.

Price pressures were driven by key items in the basket of goods, namely Transport (+5.7%), Food and Non-alcoholic Beverages (+3.8%) and Housing and Utilities (+2.2%) sectors.

Under the new classifications, the Department of Statistics was able to show that prices of durable goods, non-durable goods and services expanded 0.5%, 3.5% and 2.6% respectively.

Similarly, inflation within the urban area increased faster at 2.8% y-o-y, compared to the expansion of 2.5% y-o-y within the rural area.

Our comments

January’s inflation rate expanded below Bloomberg consensus estimate of 2.8%.

Overall, the inflationary trend appears to be easing, as the 3-month moving average is at 3.1% in January (3M moving average of Dec17: +3.5%).

However, on a seasonally adjusted (SA) m-o-m basis, CPI expanded by 0.3% (Dec17: +0.1%) for the third consecutive month, indicating the occurrence of high-base effect.

Meanwhile, the Food and Non-alcoholic Beverages sector (29.5% of total CPI) rose 0.6% mo-m (Dec17: +0.7%), mainly due to an increase in fresh seafood and vegetable prices, which rose 0.9% and 3.7% m-o-m, as the monsoon season extended into the month of January.

At the same time, the Transport index (14.6% of total CPI) expanded 0.4% m-o-m (Dec17: - 0.7%), mainly attributed by higher retail pump prices (RON95), averaging at RM2.29 per litre in January (Dec17 RON95 avg: RM2.27 per litre). When compared to corresponding period in the preceding year, pump prices were higher by 0.17 sen per litre.

During the month, Brent crude oil prices averaged higher at USD69.1 per barrel (Dec17 avg: USD64.1 per barrel). However, the further strengthening of Ringgit compensated for the higher oil price, preventing pump prices from surging higher during the month (Jan18 avg: RM3.96 per USD vs Dec17 avg: RM4.08 per USD).

In the meantime, the Consumer Sentiment Index (CSI) tracked by MIER has improved slightly (4Q17: 82.6 vs 3Q17: 77.1), with a lower percentage of respondents anticipating higher inflation in the near term as indicated by MIER’s Inflationary Expectations (4Q17: 80% vs 3Q17: 82%). This is in-line with our view of normalising inflationary pressures in the upcoming months.

Following the latest Overnight Policy Rate (OPR) hike in January, we expect BNM to maintain an accommodative monetary policy view, keeping rates at 3.25% for the rest of 2018. Finally, we reiterate our 2018 CPI forecast of 3.0%-3.5% and GDP growth at 5.4% (2017: +5.9%).

Source: Alliance Research - 28 Feb 2018