CPI expanded 1.1% y-o-y in September, from +1.5% y-o-y in August

•  We expect inflation to trend upwards slightly in coming months

•  We maintain our 2019 inflation forecast at 0.8% y-o-y

Highlights

Malaysia’s Consumer Price Index (CPI) expanded by 1.1% y-o-y in September compared to 1.5% growth in Aug. YTD-Sep19, CPI expanded by 0.6% y-o-y (YTD-Sep18: +1.2% y-o-y). In September, the expansion in inflation was attributed to higher prices for Miscellaneous Goods and Services (+2.7% y-o-y); Food & Non-Alcoholic Beverages (+2.2% y-o-y) and Alcoholic Beverages and Tobacco (+2.4% y-o-y), which offset price contraction in Transport (-2.2% y-o-y) and Clothing & Footwear (-1.0% y-o-y). Meanwhile, the price of durable and non-durable goods expanded by 2.3% y-o-y and 0.2% y-o-y, respectively, while the price of services grew by 1.9% y-o-y during the month. Furthermore, inflation in urban areas and rural areas expanded 1.2% y-o-y and 0.8% y-o-y, respectively, during the month.

Our comments

September’s inflation rate came in lower than Bloomberg’s consensus of 1.3% y-o-y. In September, the 3-month CPI moving average rose 1.3% y-o-y (Aug: +1.5% y-o-y) while core inflation (excluding Food and Transport segments) expanded 1.5% y-o-y (Aug: +2.0% y-o-y) – both indicating that the underlying trend of persistently weak inflationary pressure is normalising as the base effect of consumption tax policy change diminishes. The contraction in the transportation sector continued (Sept: -2.2%, Aug: -2.1%, July: - 1.9% vs. June: - 2.1%) mainly due to the contraction in Fuels & Lubricants for Personal Transport Equipment (-5.0% y-o-y) which captures the lower RON97 pump prices (Sept19: RM2.60 per litre vs Sept18: RM2.65 per litre). Going forward, the removal of the price-cap on RON95 and diesel amid the introduction of a targeted subsidy system would likely raise inflationary pressures. The retail pump prices for RON95 and diesel will be determined by a float mechanism. The government expects headline inflation to pick up in 2020 at 2.0% y-o-y (2019e: 0.9% y-o-y), largely due to the targeted implementation of petrol subsidy, coupled with the base effect of SST reimplementation. On the other hand, the government’s initiatives – which include but not limited to the increase in the number of Bantuan Sara Hidup (BSH) recipients, tax incentives, increment in minimum wage in urban cities as well as the measures to improve home affordability and ownership – are expected to alleviate the rising cost of living and financial burden faced by B40 households. Overall, we maintain our 2019 inflation forecast at 0.8% y-o-y (2018: +1.0%) due to weak inflationary pressures in 1H19, coupled with initiatives introduced by the government to deal with the issue of rising cost of living. Going into 2020, we expect inflation to come in between 2.0% to 2.5% y-o-y, in view of the normalising inflationary trend due to low base effect and the removal of price cap for RON 95 and diesel.

Source: Alliance Research - 24 Oct 2019