● Headline inflation expanded for the fourth straight month in June (4.35%; May: 3.55%), the highest in 60 months and above consensus (4.17%). The headline inflation reading has exceeded Bank Indonesia’s (BI) inflation target band of 2.0-4.0% for the first time since June 2017

− MoM: accelerated (0.61%; May: 0.40%) to a two-month high.

− Core inflation: expanded slightly (2.63% YoY; May: 2.58%).

● Rising inflation due to higher prices of food, beverages and tobacco but partially capped by moderation in personal care and other services

− Food, beverage & tobacco (8.26%; May: 5.62%): expanded sharply and highest since August 2015.

− Personal care and other services (4.43%; May: 4.63%): slowed slightly, matching March 2022 growth.

● Inflation accelerates across the region

− VN: CPI expanded in June (3.4%; May: 2.9%), driven by the increase in prices of essential consumer goods and services, materials for production and transportation costs.

− SG: headline inflation expanded in May (5.6%; Apr: 5.4%), together with core inflation which accelerated to its highest in more than 13 years (3.6%; Apr: 3.3%), led by rising prices of food and utilities.

● 2022 inflation forecast revised to 4.1% from 3.5% (2021: 1.56%) while BI may hike rates soon

− Given the acceleration in the inflation rate within six months of this year, the 2022 average inflation reading may exceed our forecast if prices continue to increase on MoM basis for the remainder of the year. Headline inflation may exceed the 5.0% level on average in 2H22. With that said, we revise our inflation outlook for 2022 to 4.1% from 3.5% as we expect inflationary pressure to sustain towards 4Q22 underpinned by elevated food prices.

− Nevertheless, the momentum may be capped if BI tightens its monetary policy. Therefore, we revise our monetary policy outlook and expect BI to start raising its policy rate by at least 25 bps in July in tandem with the global central banks tightening cycle. BI may hike rates further in September and November, ending its policy rate at 4.25% by the end of this year.

Source: Kenanga Research - 4 Jul 2022