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eating our and market expectations (exhibit 1), Consumer Price Index (CPI) soared to the highest March m-m level in the last five years at 0.63 percent due to high staple food prices particularly onions, curly chilies, orange and rental house tariff.

March month-on-month inflation (m-m) translated to an elevated year-on-year (y-y) level of 5.9 percent (a 21-month high), higher than previous level of 5.31 percent. We also note that March ytd CPI increased to 2.43 percent from February’s 1.79 percent.

However, on a more positive note, March core inflation slightly declined to 4.21 percent y-y from previous level of 4.29 percent, supported by lower gold and jewelry prices.

Going forward, since harvesting period within March-April is likely to be less significant in curbing inflationary pressures coming from persistently high staple food prices, we see April’s CPI unable to book a deflation as we had expected before. At this stage, we revise up our 2013 headline inflation forecast from previously 4.95 percent y-y to 5.87 percent.

Looking forward, we also adjust our 2014 CPI from previous estimate of 5.34 y-y to 6.24 percent, particularly when general elections will provide ample money supplies that will likely generate higher demand-pull inflation ahead.

Additionally, we note that uncertainties over fuel subsidy policy could spark inflationary expectation which may push CPI to move above our new 2013 CPI target. This is despite the government not yet having issued policies aimed to reduce escalating fuel subsidies (exhibit 2). Further postponement in releasing fuel subsidy policy would harm 2013 state budget, enlarging balance of payments’ deficit and continuing to apply uncertainties on our macro economy.

Despite surging headline in March inflation that exceeded BI’s upper target level of 5.5 percent y-y, we still believe the central bank will hold its benchmark rate at 5.75 percent at the next Board of Governors (BOG) meeting on April 11 as core inflation has remained benign. However, since we expect core CPI would further rise in 1H14 (exhibit 3) due to the impact of the general elections, we expect BI to begin tightening by raising its benchmark rate by 25bps to 6.00 percent in 4Q13.

The writer is an analyst at PT Bahana Securities