ECONOMIC UPDATE - Inflation Update
Still A Manageable Inflation
August inflation came below our expectation
Statistics office (BPS) reported August consumer price index saw a deflation of -0.05% MoM and inflation of 3.20% YoY. These both came below both Bloomberg and our estimates (see table on the left). Food, clothing and transportation & communication price experienced deflation due to price normalization after the Lebaran season. August deflation brought YTD figure to 2.12% YoY.
Rupiah depreciation effect still less significant to inflation
This year has been an unfavorable condition for Rupiah as it depreciated 8.45% YTD of September 3. Theoretically, depreciation of Rupiah may lead to imported goods inflation, especially seeing import growth jump in 2018. However, the effect of Rupiah depreciation to overall inflation is still less significant. Higher core inflation in July – August was driven more by seasonality in education inflation due to new academic year. Nevertheless, we need to stay cautious in upcoming months as firms may start to raise their output prices. IHS Markit on its Indonesia’s August manufacturing PMI release stated that firms are more confidence to raise output price charge to alleviate margin pressure. With the increasing domestic demand, we do not rule out of higher imported inflation in upcoming months.
Food inflation normalize in August, but it was still high
Augusts’ Food price experienced deflation of -1.10% MoM (4.90% YoY) after significant high inflation in past 2 months (June: 0.88% MoM; July: 0.86% MoM). However, the annual food inflation remained high at 4.9% YoY, far above YE 2017 food inflation position at 1.26% YoY and August 2017 at 1.50% YoY. There are 2 main factors which drove higher food inflation this year. First, lower agriculture output in 1H18 (4.05% YoY, see exhibit 2) give a pressure to the inflation. This figure is below the 1st semester agriculture output growth at 4.44% YoY, even 1H17 agriculture growth was at 5.07% YoY. First semester every year normally always be the harvest season of major foods crops as the raining season came to an end in March – April. Late harvest season in the beginning of this year should not be a big problem if the output growth stays at around 5%. However, government still tries to stabilize the price with foods import (especially rice) in 1H18 and prevent food inflation going wild. Second, there are some new rules from the government to control oversupply that make the price of several food products jumps. For example, government culling program that made the poultry products price increased significantly in July (see our July inflation report).
Non O&G Large Wholesale Price Index had deflation of -0.07% MoM
August’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by -0.07% MoM (4.19% MoM). Mining/quarrying led the LWPI inflation for August with 1.03% MoM (5.73% YoY). Import price also experienced inflation of 0.22% MoM (3.82% YoY) and manufacturing sector posted higher price of 0.03% MoM (4.07% YoY). Meanwhile, export price experienced downtrend of -0.27% MoM (7.39% YoY) due to commodities price stabilization and agriculture products experienced deflation of -0.53% MoM (1.76% YoY).
Maintain our view of 3.5% inflation in YE 2018, BI may raise rate in September meeting
We remain optimistic that 2018 inflation will be manageable at around 3.5%. Annual inflation will pick up from current position of 3.2% YoY to 3.5% in YE due to better domestic demand. Government need to watch out for the food price in 4Q18, starting November. From inflation point of view, there is no necessity for central bank to raise the policy rate. However, significant depreciation Rupiah due to global sentiment required central bank attention to make Indonesia financial market more attractive and competitive. We see there is a possibility of rate hike of 25 bps in August and another 25 bps rate hike in 4Q18, totaling 50 bps (to 6.00%) in remaining of 2018. Nevertheless, we do not rule out a total of 75 bps rate hike to 6.25% in the remaining of 2018 (our pessimistic case - see our monetary and bonds review in July and monetary review report in August) should trade war escalate further and/or Turkey and Argentina currency crisis spread to other emerging countries.