• CPI expanded 0.9% in July, compared to +0.8% in June
• Stable inflation reflected tax-free period, moderating price pressures
• Maintain inflation forecast between 2.0% and GDP +4.8% in 2018

Highlights

In July, the Consumer Price Index (CPI) remained steady at 0.9% y-o-y, only a tad higher than +0.8% in the preceding month. YTD-Jul18, CPI expanded by 1.5% (YTD-Jul17: +3.9%).

During the month, inflation was driven by higher prices of Food and Non-alcoholic Beverages (+0.7%); Housing and Utilities (+2.0%); and Transport (+6.7%) segments.

Meanwhile, prices of non-durable goods and services expanded 1.9% y-o-y and 1.1% y-o-y respectively. However, durable goods contracted 4.8% y-o-y. Inflation in urban and rural area both expanded 0.9% y-o-y during the month.

Our comments

July’s inflation rate grew in-line with Bloomberg consensus estimate of 0.9%.

Overall, inflationary pressures continued to ease during the month (3-month moving average: July: +1.0% vs June: +1.2%); with core inflation (ex Food and Transport) remaining in negative territory (-0.2%) for the second consecutive month.

The steady low inflation was mainly attributed to stable low prices of goods, as July was the second month of the 3-month tax holiday following the zero-rating of GST effective 1 June.

During the month, the Food and Non-alcoholic Beverages sector (29.5% of total CPI) increased 0.2% m-o-m (Jun: -1.0%) as prices of fresh meat (+2.2%) and food away from home (+0.1%) contributed to the expansion.

Meanwhile, the Transport index (14.6% of total CPI) remained unchanged on a m-o-m basis compared to the previous month (Jun: -0.8%), but expanded higher on a y-o-y basis as retail pump prices (RON95) were 22 cents higher at RM2.20 per litre compared to RM1.98 per litre in July 2017.

Within the Housing and Utilities segment, the expansion of 0.4% m-o-m was mainly due to higher prices of Electricity (+3.5% m-o-m). This was because of an additional electricity surcharge of 1.35 sen per kWh on corporate users effective 1 July.

At the same time, Brent crude oil price averaged lower at USD75.0 per barrel in July (June avg: USD75.9 per barrel). However, retail pump prices have remained stable throughout the month following the fixing of retail pump prices by the new government post 14th general elections.

Nevertheless, we expect price pressures to pick up slightly in 4Q18 after the reintroduction of Sales and Services Tax (5%-10% Sales Tax and 6% Services Tax) effective 1 September 2018. Overall, we reiterate our 2018 inflation forecast of 2.0% (2017: +3.7%), on the back of lower GDP growth forecast of 4.8% in 2018.

Source: Alliance Research - 24 Aug 2018