Indonesia’s CPI Trended Higher in May, But Within 3-5%

Pressure From Cost of Food Due to Fasting Month of Ramadan

Indonesia’s headline inflation rose further from 4.2% yoy in April to 4.3% in May, the highest yoy increase since April 2016. The consumer price index (CPI) trended higher in May, due mainly to rising food and beverage prices, which accelerated from 2.8% yoy in April to 3.4%. Similarly, cost of housing and utilities, as well as cost of health, rose by 5.5% and 3.8% respectively in May. In other CPI components, cost of clothing, beverages and tobacco eased slightly, while cost of education, recreation and sports and cost of transportation, communication & finance remained unchanged in May.

Indonesia’s inflation rose by an average of 3.9% yoy in the five months of 2017, slightly lower than 4% in the same period last year. However, the country’s inflationary pressure is likely to increase in June 2017 from volatile food prices due to the holy fasting month of Ramadan. Furthermore, headline inflation may continue to trend higher from adjustments to administered prices (AP) as part of the Government’s energy reforms, particularly hike in subsidised electricity prices, which was implemented since early this year.

For full year 2017, we expect Indonesia’s inflation to average around 4.3- 4.5% (3.5% in 2016), closer to the mid-range of the official forecast of between 3-5% this year, as Eid Fitr month, which is the subsequent month of Ramadan, may continue to put upward pressure on food prices in July. Despite rising inflationary pressure, as headline inflation continues to remain within the official target range, we believe Bank Indonesia (BI) is unlikely to tighten its monetary policy and raise its main policy rate in its upcoming MPC meeting on 15 June 2017, where policy interest rate had remained unchanged at 4.75% since October 2016.

In contrast, Philippines’ headline inflation improved to 3.1% yoy in May (3.4% in April, where the improvement in CPI was reflected across the board, led by lower cost of food and non-alcoholic beverages, which eased from 4.2% yoy in April to 3.8% in May. The cost of transport, which has been trending upward since early this year, also slowed to 2.7% yoy in May (3.2% in April). Cost of education as well as cost of housing and utilities stayed unchanged in May. As global crude oil prices softened, we believe that Philippines’ inflation had possibly reached its peak in March-April periods at 3.4% yoy, and will likely to moderate in second half of the year, which is projected to average between 2.3-2.5%, which is at the lower-end of the Government’s target range of 2-4% for 2017. Supporting BSP’s assessment of a manageable inflation outlook over the policy horizon, we believe the country’s overnight reverse repurchase (RRP) facility will remain unchanged at 3.0% throughout 2017.

Source: Affin Hwang Research - 8 Jun 2017