Inflation: Sleeping dragon left the chamber unguarded

Full-year 2015 CPI rose well above our as well as market expectations

December inflation spiked to 0.96% MoM (November: 0.21% MoM), but in term of annual basis it was down to 3.35% (November: 4.89% YoY). This was 2015’s lowest YoY level but well above our estimate as well as market expectations. Higher inflation occurred in most all of the index components except for clothing, with a seasonal surge in staple food prices were a main CPI driver (up 3.2% MoM from November’s level at 0.33% MoM). BPS noted that a shoot up in staple food prices led by chilies, red onions, and chicken. Apart from higher staple food prices, Christmas festivities and year-end holidays also pushed up several CPI components including airline tariffs, hand-roll cigarette, house rental fees, as well as train tariffs. Additionally, we also noted that PLN has finally raised electricity tariff by 11.6% for capacity at 1,300 and 2,200 VA while Pertamina maintained fuel and LPG prices in December. Moreover, December core inflation also increased to 0.23% MoM (3.95% YoY) from November’s level of 0.16% MoM (4.77% YoY).

 

Non O&G Large Wholesale Price Index also rose 2.03% MoM 

Due to Christmas festivities as well as year-end holidays amid continued lower global energy and commodity prices, December Large Wholesale Price Index (LWPI) for non Oil and Gas also accelerated to 2.03% MoM (8.44% YoY). This increase was also propped by agriculture sector which up 9.6% MoM (40.1% YoY), while industry and mining sectors’ components were also higher but in a very moderate pace.

 

2016 CPI outlook with lower fuel prices    

On the back of lower world oil prices, the government asks the Pertamina to effectively cut fuel prices on 5 January. Regular gasoline price is reduced from Rp7,300 per liter to Rp7,150 in Java and Bali, while outside the area will be at Rp6,950 per liter.  Also announced was a cut in diesel price to Rp5,650 per liter from Rp6,700, down 11.2% nationwide. The total impact from this move may result in lower inflationary pressure by around 0.3%-0.7% from our 2016 CPI target of 4.74% YoY. At this stage, coupled with an expected moderate higher in administered prices due to possible adjustment on electricity tariff for PLN customers with 450-900W capacity in 2H16 and also expected moderate impact of El Nino towards staple food supplies, we remain believe that 2016 inflation could be maintained at the central bank’s target of 3%-5%.       

 

BI rate outlook: A hope for rate cuts linger in 1H16     

As a result of manageable inflationary pressure, Bank Indonesia may further contemplate to fine-tuning its monetary policy to be more expansive. Hence, we reiterate our view that Bank Indonesia may cut its benchmark rate somewhere in March-May once external volatilities to ease post last year’s The Fed rate hike. We do not expect the policy rate to be lowered in the near-term since Bank Indonesia is still vigilant over external volatilities.