● Headline inflation increased slightly to 5.51% YoY in December (Nov: 5.42%), beating the consensus estimate of 5.39%. The inflation reading is still above Bank Indonesia’s (BI) inflation target band of 2.0% - 4.0% for the seventh straight month. For 2022, inflation averaged at a higher pace of 4.21% versus 1.56% in 2021

- MoM: expanded (0.66%; Nov: 0.09%) to a three-month high.

- Core inflation: inched up slightly (3.36% YoY; Nov: 3.30%) but reached its highest level since February 2017.

● Higher inflationary pressure due to an increase in housing, water, electricity & other fuel prices

- Housing, water, electricity & other fuel (3.78%; Nov: 3.24%): rose to the highest level since January 2018.

- Transportation (15.26%; Nov: 15.45%): eased slightly amid the high base effect.

- Food, beverage & tobacco (5.83%; Nov: 5.87%): slowed slightly due to high base effect.

● Inflationary pressure stays high across the region

- VN: CPI expanded for the fourth straight month in December (4.5%; Nov: 4.4%), with the full-year average settled at 3.2% (2021: 1.8%).

- SG: headline inflation remained at 6.7% in November (Oct: 6.7%). Similarly, core inflation, the central bank’s favoured price measure, stayed at 5.1% (Oct: 5.1%).

● 2023 inflation forecast retained at 4.0% (2022: 4.21%), with room for BI to hike rates further

- Inflation may remain elevated in 1Q23, remaining above 5.0% due to lower base effect and the unleashing of pentup demand as the government lifted all COVID-19 restrictions and shifted to an endemic approach. This would be bolstered by expected higher tourist arrivals, especially from China. Likewise, the core inflation remained relatively elevated and persistently registering positive growth on an MoM basis, reflecting strong domestic demand.

- Given the persistently high inflationary pressure recorded in recent months, we still expect BI to continue raising its policy rate in 1Q23, possibly ending at 6.0%, its highest level since 2015. This will support the rupiah’s stability and ensure core inflation’s return to its target range of 2.0% - 4.0% within the first half of 2023.

Source: Kenanga Research - 3 Jan 2023