● Headline inflation expanded for the fifth straight month in July to 4.94% (Jun: 4.35%), the highest since October 2015 and above consensus (4.82%). The inflation reading has exceeded Bank Indonesia’s (BI) inflation target band of 2.0-4.0% for the second straight month

- MoM: expanded slightly (0.64%; Jun: 0.61%) for the second straight month.

- Core inflation: rose to a 28-month high (2.86% YoY; Jun: 2.63%).

● Rising inflation due to higher prices of food, beverages and tobacco as well as transportation

- Food, beverage & tobacco (9.35%; Jun: 8.26%): rose sharply and highest since the category was rebased to 2018.

- Transportation (6.65%; Jun: 5.45%): accelerated to a record high since the category was rebased to 2018.

● Elevated inflationary pressure across the region

- VN: CPI edged up in July (3.1%; Jun: 2.9%), attributable to a broad-based increase but partially capped by a decline in the transport category amid lower domestic fuel prices.

- SG: headline inflation accelerated in June (6.7%; May: 5.6%), together with core inflation which accelerated (4.4%; May: 3.6%) to its highest since November 2008, mainly due to a broad-based increase in prices.

● 2022 inflation forecast retained at 4.1% (2021: 1.56%)

- Headline inflation is expected to accelerate further in 2H22 largely due to the lower base effect and rising food prices. This will be further amplified by higher transportation costs amid elevated Brent crude oil prices brought by the ongoing Russia-Ukraine crisis.

- Likewise, we still expect Bank Indonesia (BI) to raise its policy rate in September and November by 25 bps each as the domestic economic outlook improves, supported by higher inflationary pressure. Nevertheless, we would not discount the probability that BI may remain status quo longer than expected, mainly to support growth recovery while the rupiah remains stable

Source: Kenanga Research - 2 Aug 2022