Below our, central bank’s and consensus estimates
BPS reported that October consumer price index only slightly increased by 0.01% MoM and edged down to 3.58% YoY, lower than our estimate, Bloomberg consensus (see table on the left) and central bank’s estimation (0.09% MoM). Food inflation brings the inflation down after it recorded -0.45% MoM deflation. Inflation in October brought the YTD inflation figure to 2.66%. Core inflation weakened further to 0.17% after facing high season in last 3 months due to high education inflation. This data shows that domestic demand still recovered slowly.
Lesson learned from last year, watch out for food
BPS noted that food price continued its deflationary trend in October of -0.45% MoM (0.80% YoY) due to onion and garlic harvest season in previous two months. Entering last two months in 2017, we should learn from 2016 experience when food supply was volatile due to unfriendly wet weather, especially for chili and onion. It resulted to 0.45% MoM (3.58% YoY) inflation in November. We need to stay alert as BPS reveals that red chili became the biggest component to support inflation in October even though the overall food inflation was still in negative territory. However, Meteorological, Climatological, and Geophysical Agency (BMKG) predict that la nina (extreme wet weather) will not happen this year in Indonesia until the beginning of 2018, which is a good indication for food inflation this year and next year. Rainy season also starts on time this year in October. We are quite sure that good weather will support the stability of food supply and inflation this year and in 1H18.
Non O&G Large Wholesale Price Index slightly increase at 0.05% MoM
We also noted that October’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased 0.45% MoM. The increase was much driven by increasing export price of 1.82% MoM and mining/quarrying price of 0.89% MoM due to higher commodities price, especially Indonesia’s main commodities: coal and CPO. Agriculture sector had deflation of 0.18% MoM which is in line with low Food inflation in October. Meanwhile, industry price had an increase of 0.3% MoM and import increase 0.14% MoM
Next year view: remain cautious on fuel price
We believe that inflation will still be manageable for the remaining of 2017. Food price is believed to be controable until the end of this year and government did not use its chance to increase fuel price in October (fuel price is reviewed every 3 months). We expect that inflation will be around 3.5% in the end of year. Meanwhile, we expect the hike up in domestic demand next year due to government’s populist spending, previous rate cut effect and low inflation. However, we need to be cautious for fuel price. On one side, government commitment maintain low allocation for subsidy will be challenged here. Brent oil price has surged up to above USD60/barrel and if USA does not cut its supply, we think that Brent price will remain at around USD 58 – USD 60. Higher oil price will ICP to widen to its assumption in state budget 2018 at USD 48/barrel. This could force government to increase fuel price. On the other side, government needs to maintain fuel price after it took electricity subsidy for 900 VA customers in 2017 and it will need to increase middle lower segment purchasing power next year. We need to remember that Indonesia is approaching presidential election year in 2019 which require current government to create more popular policies to maintain its popularity. We still expect that government will not increase fuel price and choose to renegotiate subsidy with the house in revised state budget or it will just put the higher subsidy burden to Pertamina. However, we also have our prediction if fuel price increase as showed in exhibit 2. All in all, we cut our 2018 inflation forecast to 3.5%.
