• CPI expanded marginally by 0.3% in September versus +0.2% in August

• Inflation under control, despite the implementation of SST

• We revise inflation forecast to 1.1% (previously at 2.0%) and GDP +4.8% in 2018

Highlights

In September, the Consumer Price Index (CPI) rose moderately by 0.3% y-o-y, against +0.2% in the preceding month. YTD-Sep18, CPI moderated to 1.2% growth, compared to +3.9% in the previous year.

During the month, inflation was attributed to higher prices of Food and Non-alcoholic Beverages (+0.5%); Housing and Utilities (+2.1%); and Transport (+0.3%) segments, which was offset by a fall in Clothing and Footwear, Communication, Miscellaneous Goods and Services which contracted 3.2%, 1.6% and 3.0% respectively.

Prices of services expanded 1.6% y-o-y. However, durable goods and non-durable goods contracted 4.5% and 0.4% y-o-y respectively.

Meanwhile, inflation in urban and rural areas expanded 0.3% and 0.2% y-o-y respectively during the month.

Our comments

September’s inflation rate came in lower than Bloomberg consensus estimates of 0.6% during the month.

Overall, inflationary pressures picked up slightly during the month (+0.4% m-o-m), although the 3-months moving average eased further to 0.4% (Aug: +0.5%). Meanwhile, core inflation (excluding Food and Transport) rebounded into positive territory (Sep: +0.3%), after 3 months of contraction due to the tax holiday period.

During the month, prices increased across most segments as expected, attributed to the reintroduction of Sales and Services Tax (SST) effective 1 Sept. However, inflationary pressures remained steady, partly due to high-base effect in the preceding year.

On a m-o-m basis, major segments such as Food and Non-alcoholic Beverages (29.5% of total CPI), Housing and Utilities (23.8% of total CPI) and Transport (14.6% of total CPI) all expanded by 0.2%-0.3%.

On the other hand, the Transport index grew 0.3% y-o-y, mainly driven by higher pump prices compared to the preceding year (RON95: Sep18: RM2.20 vs Sep17: RM2.19); (RON97: Aug18: RM2.79 vs Aug17: RM2.49); (Diesel: Aug18: RM2.18 vs Aug17: RM2.10).

As stated by the government in its mid-term review of 11th Malaysia Plan, inflation will likely remain manageable in the remaining months of 2018, despite the implementation of SST amid continued to support on the standardisation of pump prices (RON95 and diesel).

Overall, we revise our inflation forecast lower to 1.1% (previously 2.0%), in view of slower than expected increase in prices of goods after the re-implementation of SST coupled with a higher-base effect coming into the remaining months of the previous year.

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

Source: Alliance Research - 26 Oct 2018