CPI picked up to 1.5% YoY in May from 1.2% YoY in April, in line the market consensus and our expectation. Core CPI stayed flat at 2.1% YoY in May. On a sequentially seasonally adjusted basis, May CPI inflation declined by 0.1% MoM compared with a 0.1% MoM increase in April. The CPI breakdown shows that headline CPI trended up on the falling base effect of food prices, while non-food price inflation edged down in May.

Food prices continued to decline sequentially, but YoY deflation of CPI food narrowed on falling base effect. CPI food, alcohol and tobacco declined by 0.5% YoY and 0.4% MoM in May, compared with the decline of 1.8% YoY and 0.3% MoM in April. Among the CPI food basket, vegetable price fell visibly by 6.2% MoM, while egg and pork prices also recorded notable sequential decline in May. On the other hand, fruit and aquatic products prices rose by 4.2% MoM and 1.2% MoM, respectively.

Non-food price inflation edged down in May. Non-food CPI moderated to 2.3% YoY from 2.4% YoY in April. While on the sequential basis, non-food CPI stayed flat in May, compared with a 0.2% MoM gain in April. Service price index rose by 0.1% MoM, while consumer products price index declined by 0.2% MoM. Among non-food CPI components, the prices of household items and healthcare registered more notable sequential inflation, prices of transportation saw visible MoM decline.

PPI inflation declined further to 5.5% YoY in May from 6.4% YoY in April, lower than both the market consensus and our expectation. On a sequential seasonally adjusted basis, PPI fell by 0.3% MoM in May, narrower than the 0.4% MoM decline in April. The moderation in headline PPI was mainly driven by the rising base and continued correction of raw material prices. Sector Wise, YoY inflation narrowed across the board, while MoM decline of raw material prices have moderated. More specifically, PPI of mining and quarrying came in at +22.7% YoY and -0.8% MoM, compared with +28.3% YoY and -1.2% MoM in April; the overall price index of raw materials recorded 11.1% YoY gain in May compared with 13% YoY in April, while its sequential decline narrowed to 0.7% MoM in May from 0.8% MoM in April. Meanwhile, PPI of manufacturing products came in at +4.6% YoY and -0.2% MoM in April, compared with 5.2% YoY and -0.4% MoM in April.

CPI inflation may continue to trend up moderately with narrowing YoY decline in food prices, while PPI is likely to moderate further on rising base. With non-food CPI running at >2% YoY and the base falling more rapidly for food price in 3Q2017, we expect headline CPI to continue picking up in the rest of the year. On the other hand, PPI inflation may continue to decline on rising base effect, while sequential PPI inflation may have stabilized in June. Furthermore, rising CPI and falling PPI implies a potential shift of profitability growth -- from industrial product outperforming in 2H2016-1Q2017, to consumer sectors catching up since 2Q2017.