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ECONOMIC UPDATE – Inflation - Entering new year with lower inflation


Entering new year with lower inflation


Lowest inflation since August 2016

Statistics office (BPS) reported January inflation edged down to 2.82% YoY (0.32% MoM) or the lowest January figure since 2016. This also came lower than our and consensus estimates.  Meanwhile, core inflation remained stable at 3.06% YoY. We see the low inflation was due to: 1) more manageable food price compared to previous year; 2) normalization of some transportation’s price after yearend high season; 3) declining non- subsidized fuel price; 4) less significant effect from paid baggage in several LCC airlines.


Food inflation remained manageable even though it came above our expectation

Food inflation came at 0.92% MoM (1.98% YoY). However, it was much lower than Jan 2018 monthly inflation at 2.34% MoM, denoting current food price was more manageable than previous year. We see it as the impact of government’s effort to import food and maintain the supply in the market. Fresh fish drove the food sector price as it recorded 2.11% MoM inflation. Going forward, we believe food price should inch down to deflation territory until April as Indonesia will enter harvest season in March – April. Food price deflation should lead to below 3% inflation until April if government does not raise the fuel price.


Airline baggage fee less significant, fuel price decline had more effect

Initially, we expect that airlines baggage fee will push transportation inflation higher in January. However, BPS recorded that transportation, communication and financial services sector experienced deflation of -0.16% MoM.  Even it recorded transportation sector experienced deflation of -.032% MoM. There were two things that drove the deflation: 1) normalization of some transportation price after yearend high season; 2) Pertamina’s decision to lower non-subsidizded fuel price (Pertalite -1.9%; Pertamax -1.9%). Meanwhile, the air baggage fee burden that started to be given by some LCC airlines did not gave significant effect to overall inflation.


Low inflation and prospect of rate cut

Going forward, inflation may stay low at below 3% until April because of further normalization of food price after the high season and also harvest season in March – April. Government is seen to be discipline in maintaining food price to face the election season in April. The interesting question is how the central bank will react as the inflation started to move near the lower target of inflation. However, we still see probability of rate cut in 2019 is still low. We will consider the rate cut further if: 1) Fed does not increase the FFR in 2019; 2) Trade war alleviates with elimination of previous tariff; 3) Indonesia’s CAD start to move below 2.5% of GDP.