OVERVIEW

● Indonesia’s headline inflation expanded to 2.8% YoY in April (Mar: +2.5%) a tad higher than the consensus estimate of 2.7% (Bloomberg) but remained near the lower end of Bank Indonesia’s (BI) inflation target range of 2.5- 4.5%. On a MoM basis, the index expanded by 0.4% following a slight rebound in the preceding month (+0.1%). Meanwhile, core inflation which excludes administered and volatile food prices edged up by 3.1% YoY (Mar: +3.0%).

● April’s higher CPI growth was mainly due to higher food prices, expanding by 2.3% YoY (Mar: +0.6%), suggesting a strengthening in demand ahead of the fasting month as food prices normally spike prior to and during Ramadhan. Similarly, transportation, communication and finance index recorded an increase of 3.2% YoY (Mar: +3.1%) largely due to a rise in transportation prices which inched up to 4.0% YoY (Mar: +3.9%).

● Mix inflation trend in the regional economies. Within South East Asia, Thailand’s inflation was unchanged at 1.2% YoY (Mar: +1.2%) driven by an increase in transport and communication index while remaining within Bank of Thailand’s inflation target range of 1.0-4.0%. Meanwhile, Vietnam's headline inflation rose 2.9% YoY (Mar: +2.7%) underpinned by rising in the cost of education services and food. Among the advanced economy, US inflation grew 1.9% propelled by rising energy and food prices while the Fed's preferred inflation gauge, personal consumption expenditure (PCE) prices ease to 1.6% YoY (Feb: +1.7%) justifying its decision to hit the pause button on rate hike. Similarly, core inflation slowed further to 1.0% in the Eurozone, remaining well below European Central Banks’s (ECB) 2.0% inflation target.

● BI to stay put on rates. A sustained rise in inflation may further hinder any need for BI to cut its policy rate this year in line with our expectation that it would remain at 6.00%. As the economy is expected to slow this year, we forecast Indonesia's inflation to hit the lower end of our target growth range of 3.1-3.6% (2018: 3.2%) this year against consensus' 3.5%. Of concern is that inflation is likely to pick up on the possibility of any future changes in the government’s policy particularly related to the fuel and food subsidy.

Source: Kenanga Research - 3 May 2019