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ECONOMIC UPDATE – Still Food Driven Inflation


Still Food Driven Inflation


Milder- than-expected inflation

Indonesia entered New Year with a milder inflation as BPS reported that January Consumer Price Index (CPI) only grew 0.62% MoM, lower than our estimate, central bank prediction and Bloomberg consensus. Annual inflation was dragged down to 3.25% due to high basis in January 2016 (MoM inflation: 0.97%) which was caused by electricity price hike. Core inflation eased to 0.31% MoM (2.69% MoM), showing that domestic demand beside food and beverages was still subdued.


Food price still became the driver

In line with our estimation, food inflation remained high in the beginning of 2018 with 2.34% MoM (2.95% YoY). BPS noted the highest contributor of food inflation came from Cereal, Cassava & Relate segment (5.51% MoM) where rice is included. The supply of rice, especially for premium segment, is seemed unable to fulfill the demand, forcing government to import 500,000 tons of rice in 2018 to stabilize the price. Whereas, agriculture sector output in 9M17 actually had better growth than 9M16 (see our Nov inflation report: Mild inflation toward year end high season) indicating demand of food was better in 4Q17. We need to remember that food sector has the biggest proportion in consumption (around 39% proportion) which make the pickup of demand in this sector will boost the consumer sector itself. However, low core inflation showed that other sectors still do not have a momentum to recover in 4Q17. We still expect 4Q17 consumption growth will be stagnant around 4.96% YoY even though it should be better than 3Q17 growth.


Fuel prices increase still has insignificant effect

In January, Pertamina increased some fuel prices like Pertalite (Ron 90) by 1.3% to Rp7,600/liter and Pertamax (Ron 92) by 2.3% to Rp8,600/liter. However, low housing inflation (0.23% MoM) and deflation on transportation & communication sector (-0.28% MoM) showed that the current fuel increase still had minimum effect to overall inflation. We believe that both government and Pertamina remained concerned on weak consumption which prevents them to increase the fuel price significantly. As for subsidized fuel price, we think that government will renegotiate subsidy budget in revised state budget 2018. We believe Rp 500/litre is the maximum limit of subsidized fuel increase if government chooses to increase the prices, resulting inflation to hike up at 4.07% (see our 2018 outlook). Furthermore, we also believe that deflation on transportation & communication sector was also caused by declining tourist arrival to Indonesia (-5.3% YoY in Dec’16), especially to Bali (-29.8% YoY) which lowered demand for transportation service.


Non O&G Large Wholesale Price Index slightly increase at 0.76% MoM 

January’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by 0.76% MoM. Agriculture price became the main driver of growth as it recorded 1.08% MoM inflation in January, in line with increasing food price. Mining sector also recorded 0.97% MoM inflation due to higher commodities price, especially coal and oil. Export price increased by 0.58% MoM and import price increased by 0.25% MoM.


Maintain our view of 3.5% YoY inflation in 2018

We still forecast that average YoY inflation will be around 3.2% in 1H18 before it will pickup to 3.4% YoY in 2H17 and reaching 3.5% YoY in the end of this year. We do not see the necessity of central bank to shift its monetary policy as the realization of inflation and global condition is still in line with its and market prediction.