September Consumer Price Index (CPI) posed no surprises, having dropped to nearly a deflation level at 0
eptember Consumer Price Index (CPI) posed no surprises, having dropped to nearly a deflation level at 0.01 percent month-on-month (m-m), helped by deceleration on food prices as seasonal effects receded (exhibit 1).
September’s CPI, which reflected lower year-on-year (y-y) level of 4.31 percent compared to 4.58 percent y-y previously, was lower than our estimate of 0.09 percent m-m as well as consensus’ expectation of 0.26 percent (exhibit 2).
September’s core inflation eased to 4.12 percent y-y, slightly lower than previous month’s level of 4.16 percent (exhibit 2), helped by lower transportation and recreational costs which had normalized post Idul Fitri festivities.
With Idul Fitri festivities out of the way, we do not expect any major shocks on the inflationary front this year, particularly as global oil prices have dropped 7.0 percent year-to-date (ytd) despite abundance in monetary stimulus’ coming from advanced economies. Hence, we reiterate our expectation that inflation will decline to 4.1 percent at the end of this year (exhibit 3).
Looking forward, despite the Parliament’s approval on the government’s plan to raise electricity tariff by 15 percent next year, 2013 inflationary pressure will remain benign in our view as only 15 percent of state-owned electricity company PLN’s customers will bear the new higher tariff. Hence, if the government were to implement its new electricity tariff plan, inflation rate will reach 4.83 percent y-y at the end of next year, up just 53 basis points (bps) from our base estimate of 4.3 percent.
As we do not expect the government to adjust its subsidized fuel policy next year, we expect 2013’s inflationary pressure to be moderate, albeit increasing demand-pull factor due to resilient domestic demand ahead.
Thus, we believe the central bank will hold its benchmark rate at 5.75 percent throughout next year as our 2013 inflation forecast will remain within Bank Indonesia’s target range of 3.5 percent-5.5 percent. On inflation from rupiah weakness, we believe BI still has room to raise its deposit facility (Fasbi) rate by 75 bps to 4.75 percent next year as a preemptive in tightening Indonesia’s monetary system.
On the external trade side, we note that exports continued to fall to US$14.1 billion due to global economic uncertainties, decelerating 24.3 percent y-y due to slower export growth of coal, CPO and rubber. This translated to exports of $127.2 billion in the first eight months, this year, down 5.6 percent y-y.
Additionally, given holidays in August due to Idul Fitri, nearly all of our main imported goods including mechanic and electrical machineries were down 8.0 percent y-y to $13.9 billion, the first contraction in almost three years, also caused by persistent weakness in the mining-related sectors. However, this allowed August external trade to return to $250 million surplus, bringing total surplus to $500 million in the first eight months.
The writer is an analyst at research division of PT Bahana Securities Economist
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