• CPI expanded 0.8% in June, compared to +1.8% in May

• Inflation easing mainly due to zero-rated GST, effective 1 June 2018

• Maintain inflation forecast between 2.0%-2.5% and GDP +5.6% in 2018

Highlights

In June, the Consumer Price Index (CPI) moderated to 0.8% y-o-y, lower than +1.8% in May. YTD-Jun18, CPI expanded by 1.6% (YTD-Jun17: +4.0%). During the month, inflation was driven by a hike in prices of Food and Non-alcoholic Beverages (+0.8%); Housing and Utilities (+1.5%); and Transport (+5.5%) segments. Meanwhile, prices of non-durable goods and services expanded 1.3% y-o-y and 1.2% y-o-y respectively. However, durable goods contracted 4.6% y-o-y. Inflation in urban and rural area continues to expand at 0.8% and 0.9% y-o-y, respectively.

Our comments

June’s inflation rate came in lower than Bloomberg consensus estimate of 1.3%.

Overall, inflationary pressures eased during the month (3-month moving average: June: +1.2% vs May: +1.4%); with core inflation (ex Food and Transport) turning negative (-0.3%) for the first time since its rebasing in 2010.

The lower inflationary pressure was mainly attributed to lower prices of goods, following the zero-rating of GST which was effective from 1 June. During the month, prices of all segments contracted on a m-o-m basis, indicating the effect of the absence of a blanket 6% tax rate on all goods and services.

During the month, the Food and Non-alcoholic Beverages sector (29.5% of total CPI) contracted 1.0% m-o-m (May: +0.2%) as food prices fell overall, except for fresh seafood (+1.0% m-o-m) and vegetables (+0.3% m-o-m).

At the same time, the Transport index (14.6% of total CPI) fell 0.8% m-o-m (May: +0.1%), mainly due to a reduction in Purchase of Vehicles segment (-4.3% m-o-m), while retail pump prices remains unchanged since end-March (YTD-avg RON95: RM2.23 per litre), but was higher than RM2.01 per litre in June 2017.

Within the Housing and Utilities segment, the contraction of 3.2% m-o-m was mainly caused by a fall in prices of Electricity (-3.8% m-o-m), due to the absence of 6% GST charged on consumer’s electricity usage.

Meanwhile, Brent crude oil price averaged lower at USD75.9 per barrel in June (May avg: USD77.0 per barrel). However, retail pump prices have remained stable throughout the month due to the continuance of fuel subsidy by the federal government.

Nevertheless, we expect price pressures to pick up slightly in 4Q18 after the reintroduction of SST (5%-10% Sales Tax and 6% Services Tax) effective 1 September 2018 by the Pakatan Harapan government.

Overall, we reiterate our 2018 inflation forecast of 2.0%-2.5% (2017: +3.7%) and 2018 yo-y GDP growth forecast of 5.6%.

Source: Alliance Research - 18 Jul 2018