Thursday 19 July 2012

Malaysia Consumer Price Index Continues on a moderate pace – of 1.6% in June


The  inflation  rate  for  the  month  of  June  moderated  to  1.6%  YoY, making  it  the  slowest  pace  since  June  2010.  It  was  below  market expectation of 1.7%. Prices of every component in the index grew at a slower pace and combined with a higher base rate in 2011, led to an overall  more  subdued  pace.  The  core  inflation,  which  excludes  the food price index, slowed to 1.00% from 1.3%. For 1H12, the average inflation rate grew by 2.0% in comparison to 3.1% in the same period a year ago.

Looking into further details, the food & beverages subindex of the CPI increased by 2.9% YoY, a slightly slower pace from the previous months  3.0%.  On  a  monthonmonth  basis,  prices  of  food  & beverages  increased  by  0.6%.  With  no  reports  of  food  shortages  in the region and no festivities in the midst of the year, we do not think that  food  prices  will  increase  by  more  than  0.2%,  with  the  increase due  to  higher  demands  heading  into  the  Eid  celebrations  in  August. However,  there  have  been  worrying  reports  elsewhere.  Even  with global  food  index  currently  at  low  levels  (13.7%  YoY,  lowest  level seen  since  2009),  droughts  plaguing  the  United  States  have  led  to very  poor  corn  harvests  (up  to  40%  of  the  crop  according  to  the  US Dept.  of  Agriculture),  which  will  in  turn  will  largely  impact  prices  of beef  and  poultry  as  corn  is  the  main  feedstock.  This  will  indirectly impact  food  importers.  But  this  concern  is  still  premature  as  even  if such  crises  were  to  rear  its  head,  it  is  estimated  that  the  impact would  only  be  seen  in  2013  when  the  impact  of  the  final  harvest could be seen. Until then, there is little point in being alarmed. 

Moving  on  the  second  biggest  component  of  the  CPI,  the  housing, water,  electricity  &  other  fuel  subindex  eased  to  1.5%  YoY  and compared  to  the  previous  month,  there  was  no  price  changes.  We have to now keep a close eye on this index as there is the possibility of water shortages in the state of Selangor and Kuala Lumpur due to demand for treated water outstripping capacity as mentioned by the state’s water  concessionaire  Syabas.  We  cannot  be  certain  how  the issue will be addressed but as it is, we remain on the cautious side as news develops. 

The third biggest contributor the CPI, the transportation index, grew at a slower pace of 0.1% YoY from 0.4% previously. Compared to the preceding  month,  prices  fell  by  0.3%.  We  maintain  our  belief  that there will be little change in the prices of fuel as we only assume that any form of subsidy cut on the RON 95 will not happen so close to a general  election  or  even  too  soon  afterwards.  As  with  subsidised forms of oil used in manufacturing and construction, there is little to worry    what  with  WTI  hovering  around  the  moderate  levels  of US$90/b and Brent at US$100/b. If anything, the impact will be just a small blip in the inflation index. 

Outlook
A  low  rate  of  inflation  is  burden  lifted  off  the  shoulders  of  central Source:  Bloomberg, Kenanga Research bankers, allowing monetary authorities to act as needed to boost the economy.  Such  is  the  case  in  the  USA  and  Europe    with  potential further easing of policies and additional stimulus packages to drive economies tethering on the brink of recession. 

As with the case for Malaysia, a low inflation rate could indicate a slowing economy. However, figures indicate that the domestic economy  is  thriving  despite  the  situation  in  the  global  arena.  This  resilience  allows  Bank  Negara  Malaysia  to  retain  its  Overnight Policy Rate even though many of its peers in neighbouring countries have done otherwise. At this juncture, we are retaining our CPI forecast at 2.4% for the whole for 2012, on the expectation of an inflationary spillover in 2H12 when we expect a global economic rebound, at the very least – from our Asian compatriots.

Source: Kenanga

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