ECONOMIC UPDATE Inflation - More controllable food inflation during festive period

Same inflation level as previous year’s Lebaran

According to BPS, June’s CPI rose by 0.69% MoM (4.37% YoY), beating our estimate and Bloomberg consensus (see table on the left). This monthly figure is exactly equivalent to previous year’s inflation during Lebaran peak in July. Although inflationary pressure during Ramadhan and Lebaran festive period in 2017 (May and June) was disturbed by subsidy adjustment for electricity price, total inflation during this period of 1.08%, was softer than 2015 (1.47%) and 2016 (1.35%). In sum, June’s inflation brought the Ytd inflation figure to 2.38%. Core inflation was at 0.26% MoM (3.07% YoY), indicating that domestic demand increased during peak of these festive period. This was also supported by significant increase of import in May which grew by 24.03% YoY.

 

Significant pressure from transportation and electricity sectors

As we expected, transportation and communication sectors gave a significant pressure to June’s inflation. According to BPS, this sector price increased 1.27% MoM during June, slightly below our estimate of 1.3% MoM. Some transportation service providers usually increased their tariff significantly, even can reach 100% for some busy routes, during mudik period. However, the tariff will normalize in next month which triggered deflation on this sector. Furthermore, subsidy adjustment of electricity price for 900 VA postpaid customers also gave further inflationary pressure, as it led to housing sector inflation to 0.75% MoM. As we’ve noted before, the pressure from electricity price adjustment will give more impact in June rather than May, as the target of price adjustment is for postpaid customers, which proportion to total customers is higher than prepaid (postpaid: 17.18% of total, prepaid: 12.25%). Moreover, demand for new clothes in festive period also lifted up clothing sector inflation by 0.78%.

 

Taming food prices a success story

During Ramadhan period this year, government gave extra effort to control food prices. In  the peak month of Lebaran, food sector inflation reached 1.66% MoM in last five-year average. Last year during Ramadhan period, food sector inflation reached 1.61% MoM in June and 1.12% MoM in July. This year during Ramadhan period, food sector inflation was only 0.86% MoM in May and 0.69% MoM in June. We see that tight food supply control by government led to more stable food price, especially in traditional market. According to BPS, highest inflationary pressure in food sector during June came from vegetables sub-sector , registering price increase of  3.56% MoM. However, some food commodities which usually become the high inflation contributors, i.e chillies and garlic, had deflation during June. In the future, it should  help keep inflation on target and stimulate economic growth, especially for middle class sector, if this trend is maintained.  

 

Retain year-end inflation forecast at 4.0% YoY

In 2H17, we believe that significant inflationary pressure will only come from last stage of subsidy adjustment of electricity price for 900VA customers in July. We expect that effect of the last stage is not as significant as previous period. We also predict that government will not increase the price of subsidized fuel as Brent oil price started to move below USD 50 per barrel. However, there may be a slight increase of Pertamax price. Inflationary pressure will also come from the start of new school academic year in August even though it will not affect headline inflation too much. We see that there is no significant inflationary pressure as long as government can continue to maintain food prices untill the end of this year. In sum, we maintain our year-end inflation forecast at 4.0% YoY.