Jalan2Economic: Inflation: Higher in August, lower in subsequent months


Arga Samudro - Economist Bahana Securities

On the back of Lebaran-related activities, August Consumer Price Index (CPI) soared to 0.95percent month-on-month compared to July’s level of 0.7 percent, translating to year-on-year CPI of 4.58 percent, slightly higher than July’s 4.56 percent due to increases in staple food, clothes, education and transportation prices.  August figure was higher than our estimate of 0.68 percent month-on-month and consensus’ expectation of 0.8 percent. 


August core inflation surged to 0.97 percent month-on-month, much higher than previous month of 0.53 percent, propelled by transportation and recreational costs during Lebaran. Additionally, education costs also increased in the new academic year.  However, on a year-on-year basis, core inflation declined to 4.16 percent on lower base effect (exhibit 1).


Although August inflationary pressure was elevated on seasonality, we believe this is temporary in nature.  We expect CPI to ease in the remaining months this year as global uncertainties will continue to slow commodity/energy prices in general. Hence, we still believe CPI will decelerate to 4.1 percent year-on-year at the end of this year, in line with BI’s target of 3.5percent-5.5 percent. Thus, we expect BI to hold its benchmark rate at 5.75 percent, unchanged throughout this year.   

Although still falling 7.3 percent year-on-year, July’s export of USD16.2b improved compared to last month’s drop of 16.6 percent year-on-year, helped by 50 percent month-on-month jump in CPO exports.  On the flip side, July exports still suffered from lower demand of mineral fuels, rubber, electrical and mechanical machineries.  This translated to 2.5 percent year-on-year contraction in Indonesia’s 7M12 exports.       

On the import front, we saw some easing in July to USD16.3b, down 0.8 percent year-on-year, but still translated to 7M12 import growth of 13percent year-on-year.  As a result, trade deficit reached USD0.2b in July (exhibit 3), but lower compared to previous month deficit of USD1.3b, bringing 7M12 external trades to experience a surplus of USD330m. 

On further pressure coming from declining exports, we expect widening current account deficit ahead, resulting in continued pressure on our local currency.  At this stage, we have assumed weaker currency and moved our year-end 2012 IDR target to 9,450/1USD from 9,150/1USD previously.  However, we still expect some IDR strength in 2013 to IDR9,250/1USD on strong investments.  
      
As widening current account deficit will result in higher demand of USD in the domestic financial market, BI will continue to maintain IDR stability through intervention which would bring down foreign exchange (FX) reserves going forward. Hence, we revise down our 2012 FX reserves to USD102b (still sufficient to cover 6 months of imports) from USD117b previously.  


Exhibit 1. Headline & core inflation

Aug 12
BS
Cons.
Jul 12
Inflation (percent, month-on-month)
0.95
0.68
0.80
0.70
Inflation (percent, year-on-year)
4.58
4.30
4.41
4.56
Inflation (percent, y-t-d)
3.43
3.16
3.28
2.48
Core infl (percent, year-on-year)
4.16
3.76
4.04
4.28
Source: National Statistics Bureau, Bloomberg, Bahana estimates


Exhibit 2. Inflation & BI rate
Source:  Bloomberg, Bahana estimates


Exhibit 3. External trade balance
Source: National Statistics Bureau