Malaysia food prices, transport costs edged up 2.8%

These slight increases are results of the post-Ramadan celebrations.

According to OSK DMG, low inflation remained the norm in Aug as headline inflation rose by 1.4% yoy, the same pace as in Jul and the lowest since Mar 2010. This was in line with both consensus and expectations of 1.4%.

Here's more from OSK DMG:

As a result of the end-of-Ramadan celebrations, food prices, transport cost and furnishing cost rose by 2.8%, 0.0% (a slight deterioration from Jul’s -0.2%) and 1.9% yoy respectively.

In contrast, the other components of the CPI basket either showed improvement or were unchanged from the previous month. For example, housing cost was up 1.5% yoy in Aug, unchanged from Jul. Helping to keep prices benign so far are the subsidies on certain foodstuff like sugar and fuel that have helped to mitigate demand-pull inflation resulting from strong domestic demand.

Looking ahead, we expect inflation to remain benign for the rest of the year, barring a supply shock or disruption. While demand-pull inflation from strong domestic demand (as a result of government spending on infrastructure and ETP projects as well as higher private consumption spending) could lift prices domestically, continued government subsidies and price caps should keep inflation manageable.

As well, steady policy rate of 3.00% to date has helped to anchor inflationary expectations. Inflation should average about 1.5% in the last four months of the year vs. the 1.8% yoy we have seen for the first eight months of 2012. We now expect inflation to rise by 1.4% and 1.5% yoy in 3Q and 4Q respectively and to average 1.7% for the full-year. For 2013, we are maintaining our inflation forecast of 2.5% for the moment.

This is because we expect fiscal consolidation to take place following the general elections, resulting in the resumption of subsidy rationalization (such as fuel subsidy cuts) which could see prices rise. Moreover, the economy is also likely to continue to expand healthily by 4.9% in 2013.

With only one more policy meeting to go in Nov, it is unlikely that Bank Negara would change policy direction given the low inflation environment so far. However, with inflation risks tilted to the upside in 2013, we think that the central bank could move to curb inflationary pressures from building up following any subsidy rationalization (as discussed above).

However, any moves would likely come only after the general elections are over and barring any event shocks. We think that should inflation start to pick up, the central bank could respond by hiking the overnight policy rate by 50 bps in 2013 (possibly by 25 bps each in 2Q and 3Q). Until then, Bank Negara is expected to keep its policy steady at 3.00%.