● Headline inflation climbed to a three-month high in August (1.59%; Jul: 1.52%), a tad lower thantheconsensus of 1.60%, and remained below Bank Indonesia’s (BI) inflation target band of 2.0-4.0% for the fifteenth straight month

- MoM: only a marginal increase (0.03%; Jul: 0.08%).

- Core inflation: moderated slightly (1.31%; Jul: 1.40%).

● Inflationary pressure attributable to the base effect, supported by relatively higher food, beverage & tobacco, and education prices

- Food, beverage & tobacco (3.31%: Jul: 2.74%): accelerated to an eight-month high, partly due to base effect, as MoM basis fell by 0.32%.

- Education (2.26%; Jul: 1.63%): rose to a 13-month high as children returned to school.

● Higher inflationary pressure across the region

- VN: CPI rose to a three-month high in August (2.8%; Jul: 2.6%) due to supply disruption amid COVID-19 movement restrictions.

- SG: inflation expanded to 2.5% in July (Jun: 2.4%), the highest since November 2013. Meanwhile, core inflation, the central bank’s favoured price measure, rose 1.0% in July, surpassing pre-pandemic levels due to higher electricity and gas costs.

● 2021 CPI forecast retained at 1.9% (2020: 2.04%)

- While domestic COVID-19 conditions are improving, fears remain associated with the potential resurgence as the authorities started eased movement restrictions in greater Jakarta, Bandung, Surabaya, and a few other regions. This could prompt reinstatement of lockdown and weigh on consumer confidence in the future. Nonetheless, as the economy reopens, we expect inflationary pressure to gradually increase, supported by the base effect and higher commodity prices.

- On the monetary policy front, we retain our outlook that BI is expected to keep the policy rate steady at 3.50% for the rest of the year amid heightened global financial instability brought by the US Fed policy shift and fears over the rising global COVID-19 infections driven by the Delta variant.

Source: Kenanga Research - 2 Sept 2021