ECONOMIC UPDATE - Inflation - The Peak is Manageable

ECONOMIC UPDATE - Inflation

The Peak is Manageable

 

June inflation in line with our expectation

June inflation is reported at 0.59% MoM (3.12% YoY), above Bloomberg consensus but relatively in line with our estimates (see table on the left). This is the lowest monthly inflation in Lebaran season after 2010, showing that this year Ramadhan and Eid al Fitr inflation is relatively manageable. Meanwhile, core inflation slightly eases to 2.72% YoY, in line with manufacturing PMI which weaken to 50.3 in June even though still in expansive territory

 

Food and Transportation sector inflation higher than last year

During Eid al Fitr season, food and transportation sector always have higher inflation than usual. In 2018, both sectors have higher inflation pace than previous year. Transportation and communication sector lead the June monthly inflation with 1.5% MoM (1.93% YoY), higher than previous year monthly inflation at 1.27% MoM (5.8% YoY). Air transport became the major driver of transportation and communication inflation as it contributed 0.15% to total inflation. Food sector posted 0.88% MoM (4.67% YoY) inflation, higher than previous year 0.69% MoM (2.43% YoY) inflation. Although this year food inflation is higher than 2017, we still see it as manageable as food inflation can be below 1% MoM during Eid al Fitr season. Although both food and transportation sector had higher inflation than 2017, the headline inflation was still lower than previous year, thanks to stable electricity price in this year. In 2017, first semester inflation was mainly driven by significant electricity price hike for 900 VA customers. Going forward, we see that food and transportation sector price will stabilize in June and will start to pick up again in November and December.

 

Global oil price has peaked; fuel price will not have significant increase this year

Pertamina raised fuel price again for Ron 92 and higher type (Pertamax and higher) for the third time in 2018 due to higher global oil price. Pertamax price increased by Rp 600 (6.7%) to Rp 9,500. We see that the effect of Pertamax price increase will be below 0.1% or less significant to headline inflation. Based on previous experiences in this year, Pertalite and Dexlite price will follow the increase as well within 1 month. Going forward, we see that room for fuel price increase has been limited as we believe current oil price has peaked around USD 70 – 80/barrel. Saudi and its OPEC allies have signaled to start increasing crude oil production, meaning the price will stabilize in rest of 2018. Moreover, US has requested Saudi and allies to increase the oil production to stabilize price after US and its allies banned Iran oil import.

 

Non O&G Large Wholesale Price Index slightly increase at 3.49% YoY 

June’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by 3.49% YoY (0.18% MoM). Higher commodities price, especially coal, brought export products price to grow 4.9% YoY (0.18% MoM) and mining/quarrying products price to increase by 4.48% YoY (0.2% MoM).  Manufacture products price rose by 3.62% YoY (0.18% YoY) while agriculture products price rose

 

Inflation to pick up for 3.5% due to better domestic demand

We see that inflation will be bottomed in July 2018 as we predict monthly deflation due to food and transportation sector price stabilization. We still confidence that inflation will pick up to 3.5% due to better domestic demand than 2017. The 100 bps policy rate hike in May – June is seen to have less effect to macroeconomic in this year but it will start to affect it by 1Q19.