● Headline inflation slowed to a ten-month low in June (1.33%; May: 1.68%), lower than the consensus of 1.41%, and remained below Bank Indonesia’s (BI) inflation target band of 2.0%-4.0%.
- MoM: declined (-0.16%; May: 0.32%), lowest since September 2019.
- Core inflation: expanded (1.49%; May: 1.37%) to a four-month high.
● Slower inflationary pressure as COVID-19 resurgence hit demand and supply, and partly due to normalisation in prices after festive season spending
- Food, beverage, & tobacco (1.85%: May: 3.05%): slowed on weak demand as consumer spending subsided post-festive season and partly due to the surge of new COVID-19 cases during the month.
- Transportation (0.09%; May: 0.85%): moderated sharply as mobility restriction to curb COVID-19 infection weighed on demand for fuel.
- Clothing and footwear (1.18%; May: 1.32%): moderated as prices normalised after the festive season.
● Higher inflationary pressure across the region
- SG: inflation accelerated in May (2.4%; Apr: 2.1%), highest since November 2013 due to higher private transportation and accommodation.
- VN: CPI grew 2.4% in June (May: 2.9%) attributable to increased materials, fuels, electricity, and freshwater prices.
● 2021 CPI forecast downgrade to 1.9% (2020: 2.04%) from the previous forecast of 2.3%
- Inflationary pressure is expected to remain subdued in the near term amid the surge in COVID-19 infections, as Indonesia reported a record number of cases. The government will tighten mobility restrictions in some areas, with Java and Bali are bracing for emergency lockdown measures this week.
- Nonetheless, we still expect inflationary pressure to gradually increase in the 2H21 on the back of base effect and wider vaccine rollout. Given the domestic COVID-19 development and heightened global financial instability amid the US Fed hawkish turn, we expect BI to hold the policy rate steady at 3.50% for the rest of the year.
Source: Kenanga Research - 2 Jul 2021