Prepare to Jump on the seasonal crossbeam

May inflation soared to 0.24% MoM due to seasonal trend

May CPI surge to 0.24% MoM (April: -0.45% MoM) on the back of rising prices for almost all components during the advent of June’s fasting month. The CPI reading was lower than our estimate but relatively in line compared to consensus projection. We note that in term of MoM CPI level during the advent of fasting month, May 2016 inflation was the lowest level for the past 4 years. This could also signal a flat demand, in our view. At the same time, in YoY basis, CPI plunged to 3.33%, the lowest level since December 2009. In sum, May CPI brought YTD figure to book an inflation of 1.19% (2015: 0.42% YTD).

May core CPI rebounded on the backdrop of incoming summer holidays

Moreover, on the breakdown, staple foods and transportation were the main component drivers in lifting price level in May. The Indonesian Muslim preparation for fasting month had surged staple food prices especially chicken, eggs, and sugar. Meanwhile, incoming summer holidays which prone to hike airline and train tariffs increased transportation component to 0.21% MoM (April: -1.60% MoM) although Pertamina reduced non-subsidized Pertamax prices by 1.5%, while regular gasoline and subsidized diesel prices unchanged. However, PLN’s electricity tariff for 12 customer groups was slightly raised by 0.8% MoM. Also, it is worth noting that higher demand-pull factor on seasonal effect succeeded in accelerating May’s core inflation to 0.23% MoM (April: 0.15% MoM).

Non O&G Large Wholesale Price Index also rose to 1.23% MoM 

Also, we note that May Large Wholesale Price Index (LWPI) for non Oil and Gas also lifted to 1.23% MoM (11.39% YoY). Subsequently, all of LWPI components trended up including mining and agriculture sector, whereas wholesale prices for external trade activities also picked up supported by higher oil prices.  

Inflation outlook: Should be peaking in June-July prior to decelerate post Lebaran

Looking forward, we believe inflationary pressure in second semester will be underlined by three major factors. 1) Fasting period, Lebaran festivities and back-to-school effect will historically trigger demand-pull factor, driving prices up to peak in June-July. 2) Expected further short-term Rupiah depreciation due to speculative trend on The Fed’s monetary move would spark higher LWPI ahead, though we do not believe this could sustain over the medium-term. 3) The Indonesian Agency for Meteorological, Climatologically and Geophysics has warned that higher probability of La Nina may occur in July-September, while the impact would be more severe if La Nina were to remain at the rainy season, enlarging floods, disrupting food distribution. Nonetheless, The Agency stated the possibility of prolonged La Nina remains low. At this stage, we believe inflationary pressure to remain under control since Rupiah weakness may be temporary and further confirmed strong signal of La Nina may be required to alter our inflation target. We reiterate our view that post Lebaran festivities, CPI may stabilize and to reach 3.9% YoY.