Indonesia's headline inflation grew 2.68% YoY in January (Dec: 2.59%) under a new formula and base year of 2018, announced by Statistics Indonesia (BPS) yesterday.

• The inflation growth was below-market expectation of 2.85%, but well within Bank Indonesia’s (BI) new inflation target band of 2.0-4.0% (2019: 2.5-4.5%).
• MoM: the index inched up to 0.38% versus 0.34% in the preceding month.
• Core inflation: moderated to 2.88% YoY (Dec: 3.02%).

The month’s headline inflation was associated with higher inflationary pressure in food, beverage, and tobacco index:

• Food, beverage, and tobacco: rose to 4.3% YoY due to a spike in chilli prices.
• Transportation: grew marginally by 0.05% YoY but registered a deflation on MoM basis at -0.89% on the back of a decline in flight tickets.

Mixed inflationary trend across advanced economies:

• US: Core PCE prices, which excludes volatile food and energy prices continue to undershoot the Fed 2.0% target in December (1.6% YoY; Nov: 1.5%).
• Australia: Inflation edged up in December but remained below the Reserve Bank of Australia’s target range of 2- 3% (1.8% YoY; Nov: 1.7%).

2020 CPI forecast maintained at 3.4% (consensus: 3.5%; 2019: 3.03%), and another rate cut a possibility:

• While inflation is expected to increase this year amid energy subsidy removal and lagged impact from monetary easing, we remain cautious of Indonesia’s growth outlook due to heightened external risks, in particular, the coronavirus contagion and geopolitical tension.
• Hence, we foresee BI to embark on at least one rate cut as soon as in 1Q20 to support growth momentum going forward.

Source: Kenanga Research - 4 Feb 2020