• CPI expanded 0.6% y-o-y in October vs 0.3% y-o-y in September

• Inflation remains steady, despite the implementation of SST

• We maintain our inflation forecast at 1.1% y-o-y and GDP growth at +4.6% y-o-y in 2018

Highlights

In October, the Consumer Price Index (CPI) expanded 0.6% y-o-y, a tad higher than +0.3% in the preceding month. YTD-Oct18, CPI growth moderated to 1.1%, compared to +3.9% in the previous year.

During the month, inflation was attributed to higher prices for the Food and Non-alcoholic Beverages (+1.2%); Housing and Utilities (+2.1%); and Transport (+0.8%) segments. However, the inflationary pressure was contained due to lower index readings for the Alcoholic Beverages and Tobacco, Clothing and Footwear and Communication segments, which contracted 0.8%, 3.1% and 1.5% respectively.

Meanwhile, the price of services and non-durable goods rose 1.7% and 0.2% y-o-y, respectively, except for the price of durable goods which fell 4.3% y-o-y during October.

Furthermore, inflation in urban and rural areas expanded 0.6% and 0.4% y-o-y, respectively, during the month.

Our comments

October’s inflation rate came in line with Bloomberg consensus estimate of 0.6% during the month.

On a m-o-m basis, October’s inflationary pressures inched up by 0.2% (Sept: +0.4%), but the 3-month moving average registered a 0.3% y-o-y growth (Sept: +0.4%). This signals a normalising trend in prices after the transition period from zero-rated Goods and Services Tax (GST) to Sales and Services Tax (SST).

In terms of the underlying inflation rate, core inflation (excluding the Food and Transport segments) remained at a stable positive rate of 0.3% y-o-y (Sept: +0.3%) since registering a contraction for three consecutive months during the tax holiday period (June-August).

Furthermore, the major segments such as Food and Non-Alcoholic Beverages (29.5% of total CPI) and Transport (14.6% of total CPI) grew 0.5% and 0.2% m-o-m, respectively, during the month. However, other major segments such as Housing and Utilities (23.8% of total CPI) and Communication (4.8% of total CPI) remained unchanged compared with the preceding month.

On the other hand, the Transport index grew 0.8% y-o-y, mainly driven by higher pump prices compared to the preceding year (RON95: Oct18: RM2.20 vs Oct17: RM2.18); (RON97: Oct18: RM2.79 vs Oct17: RM2.48); (Diesel: Oct18: RM2.18 vs Oct17: RM2.13).

Overall, we maintain our inflation forecast at 1.1%, in view of the 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.

We reiterate our recently revised 2018 GDP forecast of 4.6% (2017: +5.9%).

Source: Alliance Research - 23 Nov 2018