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Jakarta Post

Analysis: Low inflation favourable for rupiah

  • Fakhrul Fulvian

    The Jakarta Post

Jakarta   /   Fri, October 9, 2015   /  05:30 pm
Analysis: Low inflation favourable for rupiah

Beating our expectation of 0.10 percent month-on-month (mom) and the market expectation of 0.16 percent mom, Indonesia'€™s consumer price index (CPI) dropped by 0.05 percent mom, or rose 6.83 percent year-on-year (yoy) in September (7.18 percent yoy in August), driven by a staple food deflation at -1.07 percent mom, or 8.26 percent yoy (9.26 percent in August).

Prices of poultry products, red chilies, air transportation, red onions, cooking oil, fuel and eggs reported some falls in price during September. Some price cuts made by state electricity company PLN added favorable numbers to energy inflation at -0.26 percent m-m or 12.55 percent yoy (14.47 percent yoy in August), administered price inflation at -0.40 percent mom or 11.26 percent yoy (12.32 percent in August) and transportation inflation at -0.40% mom or 8.00 percent yoy (8,17 percent yoy in August).

Higher prices were still recorded for rice, education spending, gold jewelry, carrots, cigarettes and housing rentals. We suspect the continued rise in rice prices are an effect of the El Niño season.

Higher core inflation is the result of continued depreciation of the rupiah (4 percent mom in September). However, the increasing pace of mom core inflation was prevented by an economic slowdown. Mom core inflation is only at 0.44 percent mom (0.52 percent mom in August). Recent moves by Bank Indonesia in coping with rupiah depreciation should limit the October core inflation prospect. This should bode well for the strength of our local currency as the rupiah has the propensity to track CPI.

At the wholesale level, the price index also dropped 0.05 percent mom or 10.38 percent yoy triggered by a 0.22 percent mom fall in the non oil-and-gas export price index. However, the building material price index still increased 0.15 percent. We suspect imported inflation played its role here.

At this stage, we expect decreased electricity prices by 1.08-1.11 percent mom in October could continue to push energy inflation in a negative trajectory this month. The government'€™s third economic stimulus package announced Wednesday cut subsidized diesel price to Rp 6700/liter (-2.8 percent mom), although regular gasoline, Premium or RON88 gasoline , remains at Rp 7,400/liter. Additionally, we will have an LPG price cut sometime in January next year. Overall, we expect October inflation to remain low at 0.02 percent mom, translating to 6.36 percent yoy inflation.

With that said, continued low inflation should minimize the impact of the rupiah'€™s depreciation and weak economic growth by fostering greater purchasing power.

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The writer is an economist at Bahana Securities

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