• CPI expanded 0.2% in August, compared to +0.9% in July
• Low inflation reflected tax-free period, likely to rise in September
• Maintain inflation forecast of 2.0% and GDP +4.8% in 2018

Highlights

In August, the Consumer Price Index (CPI) rose 0.2% y-o-y, much slower than +0.9% in the preceding month. YTD-Aug18, CPI moderated to 1.3% growth, compared to +4.0% in the previous year.

During the month, inflation was attributed to higher prices of Food and Non-alcoholic Beverages (+0.4%); Housing and Utilities (+2.0%); and Transport (+2.1%) segments, which was offset by a fall in Clothing and Footwear, Communication, Miscellaneous Goods and Services which contracted 2.9%, 4.0% and 3.0% respectively.

Prices of non-durable goods and services expanded 0.2% y-o-y and 1.1% y-o-y respectively. However, durable goods contracted 5.0% y-o-y.

Last but not least, inflation in urban and rural area both expanded 0.2% and 0.3% y-o-y respectively during the month.

Our comments

August’s inflation rate registered lower than Bloomberg consensus estimates of 0.4% during the month, to a three and a half years low since before the implementation of GST.

Overall, inflationary pressures continued to ease during the month (0.2% m-o-m), whereas 3-month moving average eases to 0.5% (July: +1.0%). The so-called core inflation (excluding Food and Transport) remained in negative territory (Aug: -0.2%) for the third consecutive month.

During the month, prices remained steady across most segments, coming into the third and final month of the tax holiday. On a m-o-m basis, prices remain steady at a range of -0.2% to 0.2% adjustment for all segments, except for Housing and Utilities which grew 0.6%, due to higher actual rental for housing paid by tenants (+0.7% m-o-m).

On the other hand, the Transport index (14.6% of total CPI) grew 2.1% y-o-y, mainly driven by higher pump prices compared to the preceding year (RON95: Aug18: RM2.20 vs Aug17: RM2.13); (RON97: Aug18: RM2.65 vs Aug17: RM2.40); (Diesel: Aug18: RM2.18 vs Aug17: RM2.04).

According to Bank Negara in its 2Q18 Quarterly Bulletin, inflation is expected to rise after the implementation of sales and services tax (SST) in September, while full-year 2018 inflation will be lower than their previously forecasted range of 2%-3%, which is in line with our full year inflation forecast of 2%.

For now, BNM overnight policy rate will remain accommodative, as our YTD core inflation of 1.1% will likely remain stable after SST kicks in. Therefore, we expect the Overnight Policy Rate to remain unchanged until mid-2019.

Finally, we reiterate our 2018 GDP forecast of 4.8% (2017: +5.9%).

Source: Alliance Research - 19 Sept 2018