Economic Highlights (Indonesia) – 04/03/2013 RHB Research Institute [research@rhbgroup.com]

Inflation Eased Despite A Hit By Natural Disaster

¨      The headline inflation eased to 7.8% y-o-y in February 2014, from +8.2% in January 2013 and compared to +8.4% in December, mostly due to combination of lower food prices and lower household gas price. This indicates more stable price outlook in the near term.

¨      The core inflation, on the other hand, remained relatively unchanged at 4.6% y-o-y in February, compared with 4.5% in January but inched down from +5.0% in December.

¨      On a monthly basis, headline inflation declined to 0.3%, from +1.1% in January and +0.6% in December, mainly attributed to slower increase in prices of the foodstuff basket.

¨      Going forward, we expect inflation to trend lower to 6.2% in 2014, from an average of +7.0% in 2013, as we currently do not expect the Government to change its administrative pricing on the subsidised fuel price.  Also, the price development so far was in line with the seasonal price pattern, hence no structural price break coming from inadequate supply or demand-pull inflation. Thus, we expect the benchmark rate to be kept unchanged at 7.5% by the central bank in the near term.