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Macro picture: Inflation and trade updates
Exhibit 1, 2 Much lower than expected, the consumer price index (CPI) in January deflated 0
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Exhibit 1, 2
Much lower than expected, the consumer price index (CPI) in January deflated 0.24 percent month-on-month (mom), reflecting a year-on-year (yoy) level of 6.96 percent (Dec.: 8.36 percent). This unexpected figure was driven by the government's move to cut local fuel prices twice (exhibit 4) in response to a continued drop in global oil prices.
For core CPI, only the clothing component (exhibit 3) showed a price increase while the other components slowed considerably; transportation experienced significant deflation due to the fuel-price cuts. Hence, January's core inflation slowed 0.61 percent mom (4.99 percent yoy).
As a result of year-end holidays, December imports contracted 6.61 percent yoy (-2.8 percent mom) to US$14.4 billion (exhibit 2). The decrease was felt across several product sectors such as mechanical machinery, plastics and chemicals. In sum, full-year 2014 imports contracted 4.53 percent yoy to $178.2 billion.
Additionally, December's exports contracted 13.83 percent yoy to $14.6 billion as a result of weak global demand as the economies in China, Japan and India experienced sluggish recoveries. Thus, full-year 2014 exports fell to $176.3 billion, contracting 3.43 percent yoy.
December's surplus of $187 million somehow helped the full-year 2014 external trade deficit to ease to $1.9 billion from $4 billion in 2013.
Looking ahead, we expect 2015 total exports to remain flat at $176.3 billion (-0.01 percent yoy) as a result of the drop in oil prices, which would likely be followed by slower primary commodity prices, including crude palm oil and coal. However, at the same time, manufacturing exports may pick up driven by rising demand from the US (which accounts for 9 percent of Indonesia's exports). Additionally, we expect total imports to further decelerate to $175.8 billion (-1.3 percent yoy), resulting in a modest external trade surplus of $432 million.
On the back of subdued inflationary pressures and an improving trade balance, we expect the central bank, partly due to the overhang from the possible upcoming US Federal Reserve rate hike, to leave its benchmark rate unchanged at 7.75 percent at its board of governors meeting on Feb. 12.
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The writer is an economist in the Bahana Securities research department.
