economic highlights - inflation unexpectedly eased in september - 25/10/2010

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Economic Highlights

Inflation Unexpectedly Eased In September

25 October 2010

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Peck Boon Soon

(603) 9280 2163

[email protected] read important disclosures at the end of this report.

Mala

ysia

MA

RKET

DATE

LINE

PP

7767/09

/2011(02

8730)

The headline inflation rate eased 1.8% yoy in September, from +2.1% in August. This was the first easing

after six consecutive months of picking up, suggesting that price pressure has eased somewhat and the impact from

the Governments move to increase fuel and sugar prices in mid July has fizzled out. Also, the sharp appreciation

of the ringgit in recent months might have contributed to a more moderate increase in inflation during the month.

The slowdown was reflected in slower increases in food & non-alcohol beverageprices and the core inflation

rate. The moderation in Septembers CPI came as a surprise to us. Still, we believe inflation will likely trend up in

2011 due to the Governments move to gradually reduce its subsidies once every six months that will lead to higher

retail fuel and food prices. However, inflationary pressure appears not as strong as what we had earlier expected.

As a result, we have lowered our inflation estimate for 2010 to 1.7% , from +2.0% estimated previously.

Similarly, we have cut our inflation forecast for 2011 to 2.2% , from +2.8% projected previously.

Although the change in administrative pricing will lead to higher inflationary pressure, we believe Bank Negara

Malaysia (BNM) will unlikely act on it. We believe the Central Bank is likely to have done with its interest rate hikes

and the overnight policy rate (OPR) will likely stay at 2.75% until end-2010. Further out, we believe the Central Bank

will likely resume with its policy normalisation and the OPR w ill likely be raised by 50-75 basis points to bring

it to a more neutral level of 3.25-3.50% in 2011. The timing, however, will depend on how soon the global economy

stabilises.

The headline inflation rate eased to 1.8% yoy in September , from +2.1% in August (see Table 1). This was

the first easing after six consecutive months of picking up, suggesting that price pressure has eased somewhat and the

Table 1

Weights In The CPI

New 2008 2009 2010 2010 2009 2010

(2005=100) Aug Sep Aug Sep (Jan-Sep)

Group: Weights (%) %,yoy %,mom %,yoy %,Cum yoy

Food & non alcoholic beverages 31.4 8.8 4.1 +0.3 0.0 3.1 2.7 5.3 2.3

Alcoholic beverages & tobacco 1.9 7.3 6.1 0.0 0.0 3.1 3.1 7.2 3.1

Clothing & Footwear 3.1 -0.6 -0.9 -0.6 +0.9 -1.6 -0.4 -0.8 -1.5

Housing, water, electricity & gas 21.4 1.6 1.4 +0.5 0.0 1.3 1.3 1.5 1.1

Furnishings, Household equipment 4.3 3.0 3.0 -0.2 +0.2 0.6 0.8 3.6 0.6

Health 1.4 2.2 2.2 +0.2 +0.2 1.7 1.7 2.4 1.6

Transport 15.9 8.9 -9.4 +0.8 -0.2 2.7 1.8 -10.1 1.3

Communication 5.1 -0.6 -0.5 0.0 0.0 -0.1 0.0 -0.5 -0.3

Recreation services & culture 4.6 1.7 1.6 -0.3 +0.1 0.3 0.3 1.3 2.1

Education 1.9 2.4 2.3 0.0 +0.1 1.5 1.6 2.4 1.7

Restaurant & hotels 3.0 6.6 2.9 +0.2 +0.4 1.9 2.3 3.3 1.7

Miscellaneous goods & services 6.0 3.4 3.7 -0.3 +0.4 2.5 2.3 3.5 2.8

TOTAL 100.0 5.4 0.6 +0.4 0.0 2.1 1.8 0.8 1.5

Core CPI 68.6 3.7 -1.1 +0.4 0.0 1.6 1.3 -1.3 1.1

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25 October 2010



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impact from the Governments move to increase fuel and sugar prices in mid July has fizzled out. Also, the sharp

appreciation of the ringgit in recent months might have contributed to a more moderate increase in inflation during the

month. The slowdown was reflected in slower increases in food & non-alcohol beverage prices and the core

inflation rate. Despite the festive season, food & non-alcohol beverage prices moderated to 2.7% yoy in September,

from +3.1% in August. In the same vein,the core inflation rate eased to 1.3% yoy in September, from +1.6% in August.

This was the first easing in three months due mainly to a slowdown in the costs of transport, which moderated to 1.8%

yoy in September, from +2.7% in August, as the impact of the increase in fuel prices fizzled out. A pick-up in the prices

of furnishing & household products, the costs of education and charges at restaurants & hotels as well as a smaller decline

in the prices of clothing & footwear offset part of the moderation. The costs of housing, water, electricity, gas & other

fuels; healthcare; and recreation services as well as prices of alcoholic beverage & tobacco, on the other hand, remained

unchanged, while the costs of communications stagnated during the month.

Mom, inflation rate remained unchanged in September , after growing at a slightly faster pace of +0.4% in August,

as the impact from the fuel and sugar price hikes fizzled out. Consequently, both food & non-alcohol beverage prices

and the core inflation rate remained unchanged during the month. Food & non-alcohol beverage prices stagnated in

September, after easing to +0.3% mom in August. Similarly, the core inflation rate was unchanged in September, after

accelerating to +0.4% mom in August. A pick-up in the prices of clothing & footwear and furnishing & household products

as well as the costs of recreation services, education and charges at restaurants & hotels was mitigated by a decline

in the costs of transport. The costs of housing, water, electricity, gas & other fuels stagnated; while the costs of

healthcare and communications as well as prices of alcoholic beverage & tobacco held stable during the month.

In the first nine months of 2010, inflation rate rose by 1.5% yoy, faster than +0.8% in the corresponding period of 2009.

This was due mainly to a pick-up in the core inflation rate, which grew by 1.1% yoy in January-September, compared

with -1.3% in the corresponding period of 2009. The pick-up was reflected in a rebound in the costs of transport, which

rose by 1.3% yoy in the first nine months of 2010, compared with -10.1% in the corresponding period of 2009. A pick-

up in the costs of recreation services also contributed to a faster rise in the core inflation rate. These were, however,

mitigated by a slowdown in food & non-alcohol beverage prices, which eased to 2.3% yoy in January-September, from

+5.3% in the corresponding period of 2009.

The moderation in Septembers CPI came as a surprise to us. Still, we believe inflation will likely trend up in 2011

due to the Governments move to gradually reduce its subsidies once every six months that will lead to higher retail fuel

and food prices. However, inflationary pressure appears not as strong as what we had earlier expected. As a result,

we have lowered our inflation estimate for 2010 to 1.7% , from +2.0% estimated previously. Similarly, we have

cut our inflation forecast for 2011 to 2.2% , from +2.8% projected previously.

Although the change in administrative pricing will lead to higher inflationary pressure, we believe Bank Negara Malaysia

(BNM) will unlikely act on it. As it stands, its interest rate hikes thus far were geared towards normalising monetary

conditions in the economy rather than controlling inflation. Indeed, we believe the Central Bank is likely to have done

with its interest rate hikes this year, after raising it by a total of 75 basis points in three meetings and the overnight policy

rate (OPR) will likely stay at 2.75% until end-2010. Further out, we believe the Central Bank will likely resume with its

policy normalisation and the OPR will likely be raised by 50-75 basis points to bring it to a more neutral level of

3.25-3.50% in 2011. The timing, however, will depend on how soon the global economy stabilises.


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25 October 2010



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economic highlights - inflation unexpectedly eased in september - 25/10/2010

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