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ECONOMIC UPDATE – Inflation - Well managed inflation for 2018

Below our estimates but above consensus

Statistics office (BPS) reported December consumer price index inflation remained manageable at 0.62% MoM, bringing FY 2018 inflation to 3.13% YoY. This figure came below our estimates but above the Bloomberg consensus. High food and transportation and communication sector inflation is already expected but we do not anticipate other sectors inflation. Meanwhile, core inflation was slightly up to 3.07% YoY.


Dynamics of foods and transportation inflation

Due to year end seasonal factor, food and transportation inflation are usually higher than usual. Food inflation came as high as 1.45% MoM, in line with our previous estimate at 1.52% MoM. According to Bank Indonesia’s food price monitoring system (, several food prices saw significant uptrend like onion (17.4% MoM), egg (9.3% MoM) and chicken (6.9% MoM). However, this was much lower than December 2017 figure of 2.26% MoM, meaning that food inflation this year is much more manageable. On the other side, transportation and communication sector experienced 1.28% MoM inflation, higher than December 2017 figure at 0.75% MoM inflation. Air transport is said to drive this sector inflation as it contributed 0.19% to total inflation according to BPS. On August, government actually had increased floor price for air transport from 30% to 35% of ceiling price. However, the realization is still delayed to coordinate the new policy socialization with chief maritime ministry. We see Lion air crash in late October made some airlines increased the price faster, giving pressure to air transport price and overall transportation inflation.


Reviewing 2018 inflation: low effect from Rupiah depreciation and oil price

As we can say 2018 is full of drama for rupiah and oil price, market started to worry about potential of higher inflation. In October, USD/Rupiah penetrate above Rp15,000 level and Brent oil price even broke USD 80/barrel. Nevertheless, the market fear about inflation is seen inappropriate after we see the manageable inflation in 2018. We highlight two major factors that significantly help maintain inflation despite the volatility and increasing domestic demand:

1)     Government decision to maintain fuel price. This policy is seen very political due to upcoming election year. Although government increase the non-subsidized fuel price, its decision to maintain the subsidized one help reducing indirect effect of fuel price hike. Learning from 2005, 2008, 2013, 2014 experiences, the indirect effect of subsidized fuel price hike like to urban and intercity transports, logistics, and food price made the inflation gone wild.

2)     Firm decision to not pass Rupiah depreciation to customers. We can see the proof of this statement in exhibit 2 where the large wholesale product index (LWPI) had significant inflation reaching 7% YoY but the CPI inflation remain stable at 3.13% YoY. It denoted that firms choose to lower the margin considering the domestic demand remained low compared to commodity boom era which ended in 2013.


Confidence for manageable inflation in 2019

We are confidence that inflation will remain manageable this year. There are some concerns of government’s opportunity to raise subsidized fuel price after 2019 election. We agree to this statement but we do not see the increase will be very significant. We predict Rp 500 price hike for both Premium and Solar. The main reason of course the lower oil price and the appreciation of Rupiah in November and December. Furthermore, current government had made a target with Bank Indonesia to lower inflation target to 3% starting 2020. Raising the subsidized fuel price can ruin this target. The next question, what if the incumbent president (Joko Widodo) loses the election? We see that the opposition (Prabowo Subianto) has much concern on purchasing power. Raising the subsidized fuel price significantly will not support its programs. That is why we still believe of a manageable inflation in 2019 at around 3.5% YoY.