FW: Indonesia's CPI Outlook August 2017

 

Monthly Inflation:”Remain eased”

 

CPI Review

Consumer Price Index (CPI) in July 2017 eased due to the demand for goods and services returned to normal after the celebration of Eid al-Fitr in the last month. Inter-city transport and train fares have declined. On the other hand, the cost of education has increased due to the new school year. Monthly inflation reached 0.22% m-o-m, lower from 0.69% m-o-m in the preceding month. Based component, the inflation was posted by the education component increased by 0.62% m-o-m and the prepared food component rose by 0.57% m-o-m. Furthermore, the foodstuffs component increased by 0.21% m-o-m, the housing component experienced rose by 0.06% compared to preceding month, the clothing component rose by 0.06% m-o-m, and the medical care component increased by 0.15% m-o-m. Meanwhile, the deflation was posted by the transportation and communication component experienced fell by 0.08% m-o-m.

 

Inflation in the education, recreation and sports component in July 2017 mainly stemmed from higher prices of Primary school tuition, high school tuition, and learning tuition rates. Inflation in the prepared foods component in July 2017 mainly stemmed from higher prices of noodles, sweet coffee, rice with meal, mineral water, cigarette, white cigarette, and filter cigarette.

 

Furthermore, inflation in the foodstuffs component in July 2017 mainly stemmed from higher prices of fish, eggs, tomato, onion, long bean, cucumber, oranges, papaya, and water melon. We believe the price increase in these products were mainly due to

a.   Lower domestic supply

b.   Higher domestic demand

 

Meanwhile, Inflation in the housing component in July 2017 still came primarily from higher prices of household operation sub-sector.

Inflation in the clothing component in July 2017 came primarily from higher prices of children's clothing sub-sector. Inflation in the medical care component in July 2017 still came primarily from higher price of body care services sub-sector.

 

In the other hand, Deflation in the transportation and communication component in July 2017 came primarily from lower prices of intercity freight rates and train fares.

 

On a yearly basis, inflation remains in check with the downward trend still intact, as the inflation slightly decreased to 3.88% y-o-y in July 2017 compare 4.37% y-o-y in the previous month. Nevertheless, year to date inflation in January–July 2017 reached 2.60% higher than 1.76% for the same time frame in 2016.

 

CPI Outlook

We expect inflationary pressures remain eased in August 2017. This is due to the relatively stable prices of foodstuffs. Furthermore, the price of some foodstuffs decreased, such as cayenne pepper, red chili, onion, garlic, sugar, and instant noodles. Nevertheless, the prices of some foods still show increases such as rice, eggs, cooking oil, milk, and salted fish. Meanwhile, inflationary pressures stem from the rising cost of education for colleges and universities. Moreover, the price of gold jewelry also increase compared with the previous month along with rising gold prices in the world. Based on these factors, we expect the consumer price index in August 2017 will reach 0.04% m-o-m, lower than 0.22% m-o-m in July 2017. However, we expect the yearly inflation rate in August 2017 will increase to 3.93% y-o-y from 3.88% y-o-y in July 2017. Looking ahead, in line with the government's decision not to raise electricity and fuel tariffs until the end of the year, we revise down the inflation projection from 4.28% to 4.00% by the end of 2017.

 

Meanwhile, we also expect core inflationary pressures remain manageable in August 2017. The pressure comes from the increase in price of tuition fees, gold jewelry, housing rent, and housing contract. We expect core inflation in August 2017 may reach 0.30% m-o-m slightly higher than 0.26% m-o-m in July 2017. Nevertheless, we expect the yearly core inflation in August 2017 will decrease to 3.00% y-o-y from 3.05% y-o-y in the previous month. Forward looking, we still maintain core inflation projection at 3.20% by the end of 2017 due to relatively tame impact of electricity tariff increases and the government's success to control volatile foods prices.