● Headline inflation rose to 5.95% in September (Aug: 4.69%) but was slightly below the consensus of 6.00%. Nevertheless, the inflation reading is still above Bank Indonesia’s (BI) inflation target band of 2.0% - 4.0% for the fourth straight month

- MoM: rebounded sharply (1.17%; Aug: -0.21%), the highest since December 2014.

- Core inflation: expanded (3.21% YoY; Aug: 3.04%), highest since September 2019.

● Higher inflationary pressure is mainly due to an increase in prices of transportation following the fuel price hike

- Transportation (16.01%; Aug: 6.62%): rose sharply following the government’s decision to increase the prices of fuel subsidies by 30.0%.

- Food, beverage & tobacco (7.91%; Aug: 7.73%): price expanded for the second month.

● Rising inflationary pressure across the region signals further tightening in monetary policy

- VN: CPI expanded in September (3.9%; Aug: 2.9%) due to increases in the prices of essential goods and services as well as tuition fees.

- SG: headline inflation rose at its fastest pace in more than 13 years in August (7.5%; Jul: 7.0%), driven by higher prices of services and food. Meanwhile, core inflation, the central bank’s favoured price measure, rose to 5.1% (Jul: 4.8%), increasing the chances that the Monetary Authority of Singapore (MAS) to tighten monetary policy this month.

● 2022 inflation forecast was revised to 4.5% (2021: 1.56%) from 4.1% following the impact of the fuel price hike

- Headline inflation is expected to accelerate further in 4Q22, potentially hitting the 6.0% - 7.0% level due to higher fuel prices and increased food prices.

- On the monetary front, we have revised our outlook and expect Bank Indonesia (BI) to raise its policy rate further by an accumulative of 125 bps towards the end of the year in its three remaining meetings. The decision is expected to mainly control inflation and ensure rupiah stability amid the expectation of further US Fed rate hikes.

Source: Kenanga Research - 4 Oct 2022