Malaysia Consumer Price Index - Remained at 1.4% in August with slight increase in F&B index

 Inflation rate for August remained at 1.4% YoY, making it in line with market expectations and retaining its slowest  pace seen since March of 2010. There were however slight increases in the food & beverages and the furnishings, household equipment & routine household maintenance indexes in light of the Eid season. This is better translated by the monthly changes, which increased by 0.2%. Year-to-date, the average rate of inflation recorded at 1.8% in comparison to 3.1% in the same period a year ago. 

 It was unsurprising to find that the food & beverages component of the CPI increased to 2.8% from 2.6% in the month of the Eid celebrations. Logically, one would expect this component to increase rather significantly in months whence consumption of food and beverages tend to peak (even more so in a country whose cultures revolves around food) but due to subsidies of basic food items, and strict control over pricing, there was only a 0.2% price increase compared to the month preceding the celebrations.  

 The second biggest component of the CPI, the housing, water, electricity & other fuel sub-index continues to remain at 1.5 YoY and increased slightly by 0.5 % on a monthly basis. Seeing how there has been little to no news concerning the water situation in the state of Selangor nor any evidence of water shortages, we feel that this slight monthly elevation is merely a side-effect of preparation and increase in businesses in conjunction of the Eid (longer shopping hours, Ramadhan bazaars etc.).  

 As with the third biggest component of the CPI, the transportation index, there were no price increases compared to last year but a 0.3% elevation compared to the previous month. This is yet another component that can easily be related to the festivities. We continue to retain our belief that there will be little change in prices of petrol with election around the corner, keeping subsidies firmly in place. With non-subsidized fuels, even though oil prices have been on the uptrend, WTI ended below the US$100 level – at US$96.47/b in August. In addition to that, Saudi Arabia has recently agreed to increase supply to dampen worries arising from the conflict in the Middle East therefore keeping prices moderate, particularly Brent, which has been threatening to breach the US$120/b level. 

 The furnishings, household equipment & routine household index saw a 1.9% YoY increase and 0.2% MoM rise as many take this opportunity to endeavor one’s annual ‘spring cleaning’ and home upgrades.  Core inflation (removal of the food & beverages component) moderated to 0.7% YoY and increased slightly to 0.2% MoM. 

Outlook

 Although a low inflation rate can sometimes be perceived as the economy suffering from a slowdown, Malaysia has shown resilience against it.  Given that the impact of the festive month

did not have much impact on inflation and the prospect of a slowing global economic trend, we are revising our CPI forecast to 1.9% for the whole of 2012 from 2.5%. Since the CPI continues to remain subdued and expectedly so for the remaining part of this year, it would be more apt for BNM to keep the OPR at 3.0%, especially at a point where supporting growth is priority.

Source: Kenanga