• CPI contracted further 0.4% y-o-y in February, after declining 0.7% y-o y in January

• Led by falling Transport cost, due mainly to lower pump prices

• We expect inflation to normalise in the later part of the year, thus lowering our forecast to 1.0% - 1.5% y-o-y in 2019

Highlights

Malaysia’s Consumer Price Index (CPI) contracted 0.4% y-o-y during February, compared to a 0.7% contraction last month.

During the month, the contraction in inflation was attributed to lower prices for Transport (- 6.8% y-o-y); Clothing and Footwear (-3.2% y-o-y); Miscellaneous & Good and Services (- 2.2% y-o-y) and Communication (-1.2% y-o-y).

Meanwhile, the price of durable and non-durable goods fell by 3.2% y-o-y and 2.6% y-o-y, respectively, while the price of services grew by 1.8% y-o-y during the month.

Furthermore, inflation in urban areas contracted by 0.4% y-o-y, while inflation in rural areas fell by 0.7% y-o-y during the month.

Our comments

February’s inflation rate came in below Bloomberg’s consensus estimate of -0.3% y-o-y.

The 3-month moving CPI average contracted 0.3% (Jan: -0.1%), signalling that prices are still on a downward trend in the first two months of 2019.

Although inflation seems to be deflating on the surface, February’s CPI expanded 0.2% m-om (Jan: -0.5%), which was mainly due the expansion in Transport (+0.5% m-o-m); Housing and Utilities (+0.5% m-o-m) and Education (+0.4% m-o-m).

In terms of core inflation (excluding the Food and Transport segments), February’s core CPI grew 0.5% y-o-y, unchanged from the previous month which suggests that the underlying inflation remains steady.

The fall in Transport prices (-6.8% y-o-y) was mainly due to a contraction in the Fuels & Lubricants for Personal Transport Equipment sub-segment (-11.4% y-o-y). This sub-segment captured the lower pump prices during the month compared to February 2018 (RON95 Feb19: RM1.99 per litre vs. Feb18: RM2.26 per litre; Diesel Feb19: RM2.18 per litre vs. Feb18: RM2.24 per litre; RON97 Feb19: RM2.29 per litre vs. Feb18: RM2.53 per litre). However, pump prices were higher compared to the previous month as this sub-segment expanded 0.6% m-o-m.

According to Malaysian Institute of Economic Research (MIER), consumers’ inflationary expectation rose slightly with more of them expecting inflation to rise in the upcoming months, from 63% of respondents in 3Q18 to 67% of respondents in 4Q18.

Overall, accounting for the unexpected deflationary period and fixing of pump prices (RON95 and Diesel) in end-February, coupled with expectations of normalising inflationary pressures in the second half of 2019, we lowered our 2019 inflation forecast to between 1.0% and 1.5% y-o-y (previous est. 2.0%). We also reiterate our 2019 GDP growth forecast of 4.5% (2018: +4.7%).

Source: Alliance Research - 22 Mar 2019