Indonesia: July 2018 CPI inflation
July 2018 CPI inflation
- Headline inflation edged up to 3.2% yoy in July, as accelerating food and core inflation was mitigated by the slower gain in administered prices.
- Rising input costs as a result of currency weakness has yet to significantly affect overall consumer prices.
- Our average inflation forecast of 3.4% for 2018 remains intact.
A slight increase in headline inflation to 3.2% yoy in July
Headline inflation rose slightly to 3.2% yoy in July (CIMB forecast: +3.3% yoy; Bloomberg consensus: +3.2% yoy; Jun: +3.1% yoy), whereas core CPI, which strips out volatile food and administered price items, accelerated to 2.9% yoy after a stable 2.7% gain in the previous four months. On a month-on-month basis, the gain in consumer price index eased to 0.3% mom (+0.6% mom in June) on the back of declining administered price inflation (-0.7% mom vs. +1.5% mom in June).
Higher food inflation…
The monthly increase in food prices was sustained at 0.9% mom (+0.9% mom in June), as higher demand during the month-long Lebaran celebration and FIFA World Cup season exerted pressure on certain food prices, such as eggs, chicken and vegetables. Higher consumption and the low-base effect in 2H17 lifted annual food inflation to 5.3% yoy in July (+4.7% yoy in June), while annual prepared food inflation was little changed (+3.6% yoy in July vs. +3.7% yoy in June).
… was mitigated by lower transport inflation
Transport inflation eased sharply (+1.3% yoy in July vs. +2.7% yoy in Jun) as the normalisation of airfares, train and intercity transport tariffs post the long holiday season in Jun offset higher non-subsidised gasoline prices i.e. Pertamax. Fuel, electricity and water inflation stabilised (+0.9% yoy in July vs. +1.0% yoy in June) as the base effect of electricity tariff hikes in 1H17 dissipated.
Core inflation nudged up by communication and education costs
Among the core inflation components, communication & delivery inflation rebounded 0.8% yoy/ 1.1% mom in July (-0.3% yoy/0.0% mom in Jun) as a mobile service provide raised headline tariffs, whereas education costs picked up (+4.4% yoy/+1.3% mom in July vs. +3.8% yoy/0.0% mom in June) on the back of the new school year. Higher core inflation in July was also contributed by medicines (+4.2% yoy vs. +3.9% yoy in June), clothing (+3.8% yoy vs. +3.6% in Jun), and recreation (+2.4% yoy vs. +2.2% yoy in June).
The missing link between producer and consumer inflation
The weakening rupiah (-6% vs. US$ YTD) has exerted some pressure on input costs, as reflected in domestic manufacturing wholesale inflation (+4.2% yoy/+0.4% mom in July vs. +3.6% yoy/+0.2% mom in June) and non-O&G import inflation (+3.8% yoy/+0.8% mom in July vs. +2.9% yoy/+0.4% mom in June). Nonetheless, businesses remain wary of passing on the higher costs to price-sensitive consumers, according to a PMI survey by Markit; hence the reason why consumer price inflation remains stable at this juncture.
We reiterate our 2018 average inflation forecast of 3.4%
Another key contributory factor to price stability is the government’s decision to leave subsidised fuel prices unchanged until 2019, which removes significant inflationary risk. With 7M18 inflation rate at 3.3% yoy, our 2018 inflation forecast of 3.4% yoy remains intact. Given the recent rupiah stability, we expect Bank Indonesia (BI) to keep its policy rate unchanged at 5.25% at the next MPC meeting on 14-15 August 2018.
Originally published by CIMB Research and Economics on 23 July 2018.