Economic update - Inflation - Mild inflation toward year end high season

ECONOMIC UPDATE – Inflation

Mild inflation toward year end high season

 

Softer-than-expected inflation trajectory

Indonesia entered year end high season with a milder inflation in November. BPS reported that November Consumer Price Index (CPI) only increased by 0.2% MoM, which was lower than our estimate, Bloomberg consensus (see table on the left) and central bank’s estimation (0.23% MoM) and dragged down annual inflation to 3.30% YoY, Our highlighted issues in this month inflation are the more manageable food inflation and continuity of low core inflation. Mild Inflation in November brought the YTD figure to 2.87%.

 

Food price is more manageable than last year

Food inflation was reported at 0.37% MoM (-0.49% YoY), much lower than previous year at 1.66% MoM (8.52% YoY). Previously, we expected that food inflation to be more than 0.5% due to year end high season. However, more manageable food supply and tight control from government have muffled the increasing price in November. In 2016, Indonesia experienced shortage of food supply as the result of the dryness in the beginning of 2016 which disturbed the agriculture output in 1H16 as showed in exhibit 2 (please be noted that 1^st half is the major harvest time in Indonesia). More stable weather in the beginning of 2017 has pushed agriculture output back to normal at 5.11% YoY in 1H17 and ensured the supply stability until the end of 2017. Tight food supply and price management from the government also played a key role in entering the high season. We believe that more stable weather in the end of 2017 and beginning of 2018 and also continuity of government tight control on food supply and price will keep the food inflation low until next year.

 

Lower core inflation denotes domestic demand recovery still wait

Low core inflation at 0.13% MoM (3.05% YoY) showed that domestic demand was still struggle to recover. December will be the real signal whether the demand will start to recover or not. We expect a modest hike up of core inflation to 0.28% MoM which will make full year core inflation to around 3.1% YoY. Furthermore, we also believe that consumption will have a gradual recovery in 2018 on the back of fading electricity price hike effect, more populist policy in 2018, rate cut effect (in August and September) and Asian Games 2018.

 

Non O&G Large Wholesale Price Index slightly increase at 0.05% MoM 

November’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by 0.39% MoM. Export price increase still became the main driver of growth as it recorded 1.06% inflation in November. Higher export price was determined by higher commodities price, especially oil price, which also showed in mining sector wholesale inflation at 0.59% MoM. On the other side, agriculture wholesale price experienced deflation at -0.06% MoM, in line with low food inflation.

 

End of year inflation at 3.5% YoY, room for rate cut is still limited

We see that inflation will still be manageable for the remaining of 2017. Food price is believed to be controllable 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 to be around 3.5% in the end of year. However, government will decide whether it will increase subsidized fuel price in January 2018 by this month. We still believe the government will hold the fuel price due to neccessity of populist policy. Next year inflation is also expected at around 3.5%.