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Jakarta Post

Analysis: Inflation threat: No more

  • Fakhrul Fulvian

    The Jakarta Post

Jakarta   /   Thu, December 3, 2015   /  05:37 pm
Analysis: Inflation threat: No more

November inflation was back to 0.21 percent month-on-month (mom) or 4.89 percent year-on-year (yoy). This is in line with Bahana'€™s estimates of 0.20 percent mom or 4.88 percent yoy, as well as with consensus estimates of 0.15 percent mom or 4.85 percent yoy.

Food prices returned to positive territory, in line with seasonal trends, to 0.33 percent mom, compared to October'€™s -1.06 percent, or 4.96 percent yoy. This was supported by vegetable and fish prices, while vegetable fat and cooking oil saw some deflation in November.

Given the absence of a fuel-price shock limiting inflation upside risk, we saw continued low transportation inflation (Table 1) at 0.06 percent mom (October: 0.02 percent) or 3.47 percent yoy and clothing deflation of -0.23 percent mom (October: 0.25 percent) or 4 percent yoy. Processed-food price inflation was still on a positive trend, however, at 0.47 percent mom (October: 0.4 percent) or 7.97 percent yoy, as was healthcare inflation, at 0.44 percent mom (October: 0.29 percent) or 5.84 percent yoy.

In general, core CPI edged down at 0.16 percent mom or 4.77 percent yoy (Bahana estimate: 0.23 percent mom, 4.85 percent yoy) as lower depreciation brought more stable prices in November. Inflation year-to-date (ytd) was very low at 2.37 percent yoy, and the 2015 inflation forecast was cut to 2.88 percent yoy as subdued demand lowered the prospect of price hikes amid a continued drop in import prices. Inflation is forecast to rise to 4.5 percent in 2016 on administered price hikes.

On the production front, the domestic wholesale-price index (WPI) rose 1.48 percent mom (October: 0.01 percent) or 10.33 percent yoy, supported by the agriculture-price index that increased to 5.57 percent mom (October: -0.52 percent) or 37.67 percent yoy due to the low-base effect from October deflation and seasonally high staples prices approaching year-end.

From the international-trade-related WPIs, non-oil & gas imports recorded their first negative monthly price inflation in 3 years, at -0.03 percent mom or 6.46 percent yoy (October: 6.79 percent) supported by the rupiah'€™s stabilization, while non-oil and gas exports price inflation modestly rose to 0.08 percent mom (October: -1.97 percent) or 5.25 percent yoy.

Inflationary pressure is already off this year amid the global economic slowdown. Recently, the government increased electricity tariffs by 11 percent for households using 1,300 volt-ampere (VA) and 2,200 VA. The impact of this will be insignificant, in our view. Experience from 2014-2015 shows that every 1 percent raise in electricity prices only increased total inflation by 0.002 percent.

It seems that fears over high inflation are not relevant anymore as Indonesia continues to import low inflation from abroad. The data indicates that a recent drop in imports has been supported by a low annualized imports-price index growth of -19.4 percent for non-oil and gas imports and -27.0 percent for oil and gas imports (Table 2).

Without providing stimulus, our real sector is facing tight competition against global producers who are able to provide cheaper products as the producer price index continue to drop in developed markets and emerging Asian markets (Exhibit 3).

Hence, we expect December inflation to stay subdued at 0.5 percent yoy, and we forecast a 2015 year-end inflation of 2.88 percent yoy, down from the previous forecast of 4.2 percent. In our view, low inflation will become a consideration for Bank Indonesia (BI) when contemplating continued monetary easing.


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The writer is an economist at PT Bahana Securities

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