Headline inflation in June eased for the second consecutive month to 3.12% y/y, impacted by a high base and slower gains from most major commodity groups except food and transport rates. Going forward, we expect the impact from high base effect to soften and should bring about a reversal of the recent easing trend of inflation which will be gradual.

We believe the tightening monetary policy should help moderate demand pull inflation and provide some comfort on inflation from the weakening Indonesian rupiah (IDR) apart from trying to stabilise the IDR and protect the financial system. We maintain our view that BI’s monetary policy will continue to stabilise the rupiah which in turn will have some impact on demand pull inflation. We reiterate our full-year inflation projection to average around 3.5%, which is in line with the central bank's point inflation target of 3.5%.

• Headline inflation in June eased for the second consecutive month to 3.12% y/y from 3.23% y/y in May. Apart from the base effects, slower inflation came from most major commodity groups except food and transport rates. Food inflation rose in June to 4.7% from May’s 4.5%, while transport inflation gained by 1.9% in June from May’s 1.7%.

• Going forward, we expect the impact from high base effect to soften. It should bring about a reversal of the recent easing trend of inflation. We believe the upward inflationary trend in 2H2018 will be gradual.

• And with Bank Indonesia having raised its benchmark 7-day reverse repo rate by a total of 100 basis points to 5.25% in six weeks, it should help moderate demand pull inflation and provide some comfort on inflation from the weakening Indonesian rupiah (IDR) apart from trying to stabilise the IDR and protect the financial system.

• We maintain our view that BI’s monetary policy will continue to stabilise rupiah which in turn will have some impact on demand pull inflation. We reiterate our full-year inflation projection to average around 3.5%, which is in line with the central bank's point inflation target of 3.5%.

Source: AmInvest Research - 3 Jul 2018