ECONOMIC UPDATE - Inflation update
A good start to enteri Eid al Fitr peak
May inflation slightly better than expectations
BPS reported that inflation in May was at 0.21% MoM (3.23% YoY), below both Bloomberg consensus and our estimates (see table on the left). This figure is lower than May-17 inflation rate of 0.39% MoM and far below 5 year average of T-1 Eid al Fitr monthly inflation at 0.95% MoM, showing current May monthly inflation is much controllable this year. Clothing segment still led the inflation figure as it recorded 0.33% MoM price hike. Moreover, core inflation slightly improved to 2.75% YoY (0.21% MoM). May inflation figure brought YTD inflation at 1.30%.
Harvest season helped to maintain food price in May
Harvest season, which peaked in April, helped to maintain food inflation in May. Food inflation was recorded at 0.21% MoM (2.56% YoY), lower than previous year position at 0.85% MoM (3.37% YoY). Food subsector with the most volatile price, spices, experienced downtrend of -5.41% MoM (-0.65% YoY) while BPS also said that rice price continued its downtrend in May. On the other hand, foods which are not affected by harvest season like meat and fish show an uptrend in May as most of Indonesian entered Ramadhan month and prepare for Lebaran peak. For example, BPS noted subsector meat and its products had 3.19% MoM (7.31% YoY) inflation. Manageable inflation, especially in food sector, in May implies two things for us: 1) Harvest season in this year is in normal condition, giving hope of a boost for 2Q18 GDP growth 1Q18 GDP is yet to incorporate harvest season; 2) Food supply is enough ahead of Eid al Fitr peak and now it is government’s job to ensure stability of food distribution to markets. This is a good start to face peak of Eid al Fitr inflationary pressure in June.
More manageable inflation in the Peak of Eid al Fitr
We believe June’s inflation will be more manageable than previous year. There are two main reasons behind our belief. First, food supply is seen enough for Eid al Fitr peak and government has made safety net by importing rice and meat. Low food inflation in the beginning of Ramadhan (0.21% MoM in May 2018 vs 0.85% MoM in May 2017) denoted food supply is sufficient in facing Eid al Fitr. Moreover, government had promised of using its imported rice and meat to intervene the market during the peak of Eid al Fitr. Second, there will be no disturbance from major electricity price hike like in 2017. June 2017 inflation was recorded at 0.69% MoM (4.37% YoY) including the electricity price hike effect. We see that June’s inflation still can be below 0.7% MoM.
Non O&G Large Wholesale Price Index slightly increase at 0.32% MoM
May’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by 0.32% MoM (3.23% YoY. Import price is recorded as the highest at 0.82% MoM (3.91% YoY) as Rupiah keep depreciating and even breached Rp 14,000 level in May. Besides, mining sector price index experienced slight increase at 0.16% MoM (3.2% YoY). Furthermore, manufacturer sector experience deflation at -1.15% MoM (4.34% YoY), agriculture still had deflation of -0.24% MoM (2.22% YoY) while export experienced 0.48% MoM ( 2.51% YoY) inflation.
Maintain our view of 3.5% YoY inflation in 2018
In the beginning of this year, we’ve predicted that harvest season may bring down inflation to 3.2% YoY in March However, late harvest season made us wait until May to see inflation easing to 3.2% level. May low inflation denote that our inflation target of 3.5% was still in line with current situation. We see that the peak of Eid al Fitr may bring annual inflation to 3.3% level in June. Furthermore, higher domestic demand in 2H18 should bring annual inflation to 3.5% level at year-end 2018, making us confident to maintain our inflation target at 3.5% YoY in this year.