• CPI expanded 0.2% y-o-y in December, unchanged from November

• Full-year 2018 CPI at 1.0% y-o-y. We forecast inflation to expand at 2.0%-2.5% in 2019

• BNM maintained OPR at 3.25% in January

Highlights

In December, the Consumer Price Index (CPI) expanded 0.2% y-o-y, similar to the previous month. For full-year 2018, inflation expanded 1.0% y-o-y (2017: +3.7%).

During the month, inflation was attributed to higher prices for Housing and Utilities (+2.0% y-o-y); Alcoholic Beverages and Tobacco (+1.2% y-o-y); Restaurants and Hotels (+1.3% y-oy), but was dampened by a contraction in other segments such as Clothing and Footwear (- 3.2% y-o-y), Transport (-2.0% y-o-y) and Communication (-1.3% y-o-y).

Meanwhile, the price of durable and non-durable goods fell by 3.7% y-o-y and 1.0% y-o-y respectively, while the price of services grew by 1.7% y-o-y during the month.

Furthermore, inflation in urban areas expanded by 0.2% y-o-y, while inflation in rural areas fell by 0.1% y-o-y during the month.

Our comments

December’s inflation rate came in lower than consensus of 0.3% y-o-y.

On a m-o-m basis, December’s inflation growth and 3-month moving average registered at 0.1% and 0.2%, respectively, slower compared to the preceding month (both 0.3% m-o-m). This was likely due to major adjustment in prices of goods and services in conjunction with discounted goods during the year-end sales in December.

In term of core inflation (excluding the Food and Transport segments), December’s growth remained stagnant (Nov: +0.2% m-o-m).

The fall in transport prices (-0.4% m-o-m) was mainly due to lower pump prices compared to November (RON95 and Diesel fixed at RM2.20 and RM2.18 per litre since March; RON97 Dec: RM2.50 per litre vs Nov: RM2.81 per litre); as well as lower Brent crude oil prices (Dec: USD57.67 per barrel vs Nov: USD65.95 per barrel) which may have led to lower transportation cost and hence, easing the inflationary pressure.

Furthermore, Food and Non-Alcoholic Beverages (29.5% of total CPI) grew marginally by 0.3% m-o-m, mainly due to a fall in vegetable prices (-1.4% m-o-m), thus subduing the increase in milk and eggs (+2.0% m-o-m) and meat (+3.7% m-o-m) prices.

Overall, full-year 2018 inflation came in at 1.0% y-o-y, 0.1% lower than our forecast. With expectations of a normalisation of inflationary pressures in 2019, in tandem with continued high volatility in commodity prices and the reintroduction of Automated Pricing Mechanism for pump prices, we expect 2019 inflation to come in between 2.0% and 2.5% y-o-y. We also reiterate our 2018 GDP growth forecast of 4.6% (2017: +5.9%).

On a side note, BNM kept the Overnight Policy Rate (OPR) unchanged at 3.25% in their January MPC meeting. Amidst a lower inflation environment and anticipation of a moderating economic growth, we expect BNM to maintain OPR in 1H18, and subjected for a possible rate cut in 2H18 if Malaysia’s near term economic performance deteriorates further.

Source: Alliance Research - 24 Jan 2019