● Headline inflation eased to 5.28% YoY in January (Dec 22: 5.51%), lower than the consensus estimate of 5.40%. However, the inflation reading is still above Bank Indonesia’s (BI) inflation target band of 2.0% - 4.0% for the eighth straight month

- MoM: moderated (0.34%; Dec 22: 0.66%) but remained on a positive expansion for the third straight month.

- Core inflation: edged down slightly (3.27% YoY; Dec 22: 3.36%), lowest since September 2022.

● Moderate inflationary pressure due to a decline in fuel prices amid weak global crude oil prices

- Transportation (13.91%; Dec 22: 15.26%): eased due to lower price of non-subsidised fuel in line with lower global crude oil prices.

- Housing, water, electricity & other fuel (3.62%; Dec 22: 3.78%): moderated slightly.

- Food, beverage & tobacco (5.82%; Dec 22: 5.83%): remained relatively high but gradually moderating.

● Inflationary pressure stays high across the region

- VN: CPI rose in January 2023 (4.9%; Dec: 4.5%), its fifth month of expansion driven by higher consumer demand for the Lunar New Year holiday.

- SG: headline inflation eased to 6.5% (Nov: 6.7%), with the 2020 average settled at 6.1% (2021: 2.3%). Nonetheless, core inflation, the central bank’s favoured price measure, remained elevated at 5.1% (Nov: 5.1%).

● 2023 inflation forecast retained at 4.0% (2022: 4.21%)

- We reiterate our forecast as inflation is likely to remain elevated in 1Q23, remaining above 5.0% due to the lower base effect and the impact of pent-up demand as the government lifted all COVID-19 restrictions and bolstered by expected higher tourist arrivals. Nevertheless, the inflation rate is expected to trend lower from 2Q23 onwards and may return to BI’s target range of 2.0% - 4.0%.

- On the monetary policy front, we still expect BI to continue raising its policy rate in 1Q23, with the terminal rate expected to reach 6.0%, the highest level since 2015. This will further support the rupiah while ensuring inflation returns to its target range.

Source: Kenanga Research - 2 Feb 2023