March CPI: Low blood pressure, healthier life

Better-than-expected reading on slower non-staple food prices

March CPI was back into inflation territory, accelerating to 0.19% MoM (February: -0.09% MoM) although this was better than our estimate as well as market consensus expectation. On the year on year basis, the headline inflation slightly up 4.45% YoY (February: 4.42% YoY). All in all, March CPI brought YTD reading to a relatively benign inflationary pressure at 0.62% (last year: -0.44%). We note that most of all March CPI components experienced a downturn except for staple food prices including red chili, red onion and cayenne pepper due to shortage of supplies entering the pre-cycle of fasting month in May-June. Meanwhile, administered prices remained flat as Pertamina maintained regular gasoline prices while non-subsidized Pertamax prices was cut by almost 4% on stronger Rupiah and low Indonesia’s Crude oil Price (ICP). Using the similar factors, PLN also reduced electricity tariffs for 12 customer groups by almost 3% in March. Additionally, March core inflation continued to ease to 0.21% MoM (3.50% YoY) from prior month’s level of 0.31% MoM (3.59% YoY), in line with our estimate. The March core CPI brought the core YTD level at 0.8%, lower than the level of last year’s similar period at 1.25%, proving that demand-pull indicator has not recovered.

Non O&G Large Wholesale Price Index also accelerated 2.02% MoM 

Also, due to rising staple food prices in the farmers’ level, worth noting that March Large Wholesale Price Index (LWPI) for non Oil and Gas also rose 2.02% MoM (11.1% YoY). On the flip side, other LWPI components remained flat as mining and industry sector recorded slight increases while wholesale prices for external trade activities even experienced deflation on fragile global recoveries.  

Lower gasoline prices as expected; Revising down 2016 CPI target to 3.9% YoY

We may use a simple analogy of blood circulation to explain the current trend of Indonesia’s inflation. If a high blood pressure is equal to high long-term inflation, current low oil price has succeeded in bringing Indonesia’s “high blood pressure” to ease. Recently, the government hasfurther lowered the price of Premium, a widely used low-octane gasoline, and subsidized diesel to Rp6,450/liter (-7.1%) and Rp5,150/liter (-8.8%) respectively starting early April. At this stage, we believe 2016 full-year inflation could be decreased by 50bps to 3.9% YoY from our baseline level of 4.4%. However, inflationary risk may not suddenly dissipate on the current trend of volatile staple food component. Indonesia, as a body, is not relatively in a good shape since its “cholesterol indicator” may reach upper limit on insufficient staple food domestic supplies and very long supply chain involved in the form of food prices. Therefore, our new 2016 CPI target of 3.9% YoY would remain intact on the assumption of manageable volatile food prices. Entering the fasting month and Lebaran cycle in May-July, the government should conduct its best effort to maintain the food supply in the market. Otherwise, a “dizzy” symptom may attach due to high cholesterol, negating the positive impact from lower blood pressure.