Indonesia: March 2018 CPI inflation

HIGHLIGHTS

March 2018 CPI inflation

• Headline inflation accelerated to 3.4% yoy in Mar (3.2% yoy in Feb), in line with our and market expectations.
• Volatile food inflation surged to a 13-month high, primarily due to the low base effect a year ago, but was partially alleviated by the start of the rice harvest season.
• Administered price inflation is expected to ease further following the government’s plans to maintain subsidised fuel and electricity prices, as well as to lower toll rates.
• Opposing forces of volatile food and administered price inflation should keep the inflation rate stable for the third year in a row.
• We maintain our average inflation forecast of 3.4% for 2018, and expect Bank Indonesia to keep its policy rate unchanged at 4.25% at the next meeting (18-19 Apr).

Headline inflation quickens in Mar
Headline inflation picked up to 3.4% yoy in Mar (3.2% yoy in Feb; CIMB forecast: 3.4%; Bloomberg median consensus: 3.4%), whereas the gain in core inflation, which excludes volatile food and administered price components, was more moderate (2.7% yoy in Mar vs. 2.6% yoy in Feb). The sequential increase in the consumer price index (CPI) was unchanged at 0.2% mom.

Volatile food inflation at 13-month high
Low base effect lifted the annual gain in volatile food inflation to a 13-month high (4.1% yoy in Mar vs. 3.1% yoy in Feb), even though the mom increase was unchanged at 0.1%. Rice inflation eased in Mar as the start of the harvest season helped to alleviate food price pressures. Prepared food inflation remained stable (4.0% yoy in Mar vs. 4.1% yoy in Feb).

Further moderation in administered price inflation
Administered price inflation eased further (5.1% yoy in Mar vs. 5.3% yoy in Feb) as the normalisation of fuel, electricity and water services inflation (8.4% yoy in Mar vs. 9.3% yoy in Feb) more than offset stronger transport inflation (2.5% yoy in Mar vs. 2.2% yoy in Feb), which was led by further increases in non-subsidised fuel prices. Pertamina raised the Pertalite pump price by Rp200 per litre on 24 Mar 2018, citing stronger oil prices.

Clothing and health inflation propels core inflation higher
Steeper price gains in clothing (4.1% yoy/0.4% mom in Mar vs. 3.9% yoy/0.3% mom in Feb) and health (2.9% yoy/0.4% mom in Mar vs. 2.8% yoy/0.3% mom in Feb) lifted core inflation. The education, recreation and sports inflation was marginally lower at 3.3% yoy in Mar (3.4% yoy in Feb).

Reiterate average inflation forecast at 3.4% yoy for 2018F
For the past two years, public policies like the food stabilisation scheme and energy subsidy reforms had contributed to the diverging trends of administered price and volatile food inflation (correlation: -0.86 between Jan 2016 and Dec 2017 vs. +0.74 between Jan 2014 and Dec 2015). These opposing forces helped to stabilise overall inflation. As the government plans to keep subsidised fuel prices unchanged until end-2019, as well as to lower toll rates to reduce logistics costs, administered price inflation should moderate further, tempered by the step-up in base effects led by three rounds of upward adjustment in electricity tariffs in 1H17. This should mitigate seasonal inflationary pressure due to fasting month and Lebaran celebrations in May-Jun, as well as adjustments in non-subsidised fuel prices by Pertamina. Hence, we expect average inflation to moderate to 3.4% yoy for 2018 (3.8% yoy in 2017).

Originally published by CIMB Research and Economics on 02 April 2018.