Indonesia's CPI Outlook July 2014

Monthly Inflation Rise Due To the Impact of Ramadan and Lebaran

CPI Review

In June 2014, the consumer price index (CPI) increased by 0.43% m-o-m from 0.16% m-o-m in the previous month. The inflationary pressures are mainly come from the increase in the price of foodstuffs. In June 2014, foodstuffs experienced inflation of 0.99% compared to preceding month. This is caused by the seasonal factor of the fasting month of Ramadan. As in previous years, ahead of Ramadan, almost all foodstuffs began to occur up prices. The inflation in June was also posted by the prepared food component rose by 0.32% m-o-m and the clothing component increased by 0.30% m-o-m. Furthermore, the medical care component increased by 0.36% m-o-m, the prices of housing component rose by 0.38% m-o-m, and the education, recreation, and sports component increased by 0.08%. The inflation was also posted by transportation and communication component rose by 0.19% m-o-m.

Inflation in the foodstuffs component in June 2014 mainly stemmed from lower prices of chicken meat, onion, egg, tomatoes, garlic, and rice. We believe the price increase in these products were mainly due to

a.   Lower domestic supply

b.   Higher domestic demand (ahead of Ramadan)

Inflation in the clothing component in June 2014 came primarily from higher price of gold and jewelry.

Meanwhile, inflation in the prepared foods component in June 2014 mainly stemmed from higher prices of cigarettes, filter cigarette, and white cigarette. Inflation in the housing component in June 2014 came primarily from higher prices of electricity tariff, housing rents, housing contracts, labor wages, cement, and household fuels

Furthermore, inflation in the transportation and communication component in June 2014 mainly still stemmed from higher prices of air freight rates and motorcycle price. Inflation in the education, recreation and sports component in June 2014 mainly stemmed from higher prices of equipment education sub-sector.  Inflation in the medical care component in June 2014 came primarily from hike in body care services sub-sector.

On a yearly basis, inflation remains in check with the downward trend still intact, as the inflation fell from 7.32% y-o-y in May 2014 to 6.70% y-o-y in June 2014. Year to date inflation in January – June 2014 reached 1.99% lower than the 3.32% for the same time frame in 2013.

CPI Outlook

We expect inflation to rise in July 2014. This is caused by the impact of Ramadan and Lebaran. As in previous years, every Ramadan and Lebaran to make the consumption of goods and services experienced a surge. This condition makes the increase in the prices of goods and services. An increase occurred in foodstuffs, such as beef, chicken, rice, wheat, soybeans, sugar, instant noodles and milk. Furthermore, price increases also occurred in inter-city transportation tariffs, tariff carriage, air freight tariff and freight tariff. In addition, July inflation is also expected to increase due to an increase in electricity tariffs and the impact of the new school year which makes the increase in the cost of education. Based on these factors, we expect inflation in July 2014 will reach 0.99% m-o-m higher than in June 2014 which reached 0.43% m-o-m. However, we expect the yearly inflation rate in July 2014 will decrease to 4.60% y-o-y from 6.70% y-o-y in June 2014. The yearly inflation slowdown is due to begin the end of the impact of fuel price hike last year.

Meanwhile, in line with monthly headline inflation edging up, we also estimate the monthly core inflation will creep up in July 2014. This is due to the increase in the price of electricity tariff, inter-city transportation tariffs, tariff carriage, air freight tariff, and freight tariff. The increase in core inflation is also due to the impact of the new school year which makes the increase in the cost of education. We expect core inflation in July 2014 will reach 0.87% m-o-m higher than in June 2014 which reached 0.25% m-o-m. However, we expect the yearly core inflation rate in July 2014 will decrease to 4.74% y-o-y from 4.81% y-o-y in June 2014.