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CPI & SBI Outlook
CPI & SBI Outlook June 2014
June 30, 2014 11:31

Inflationary pressures started to increase in May. In this month, MoM inflation reached 0.16 percent, translating into 7.32 percent YoY inflation. On a cumulative basis, however, headline inflation only reached 1.56 percent in the first 5 months of the year, or still below the corresponding figure last year of 2.27 percent.

On a monthly comparison, prices in the foodstuffs component posted deflation of 0.15 percent, while prices in the other components continued to increase. The medical care component surged 0.41 percent, followed by the prepared foods component (+0.35 percent), the housing component (+0.23 percent), the transportation component (+0.21 percent), the clothing component (+0.12 percent), and the education component (+0.07 percent).

The prices of several major commodities (such as red chilies and rice) continued to decline in May due to the impact of the harvesting season. Ahead of the fasting month of Ramadan, however, food prices will tend to rise, especially since the harvesting season is also predicted to end in June. Furthermore, the mid-year holiday season prior to the start of the new school year will also put pressures on prices. Besides the impact on inflation from stronger demand for basic foodstuffs and higher recreational spending, transportation costs will also head higher.

In June 2014, the House of Representatives approved the government’s proposal to raise electricity tariffs. Electricity tariffs will start to be increased on 1 July by between 5.36 – 11.57 percent with further hikes taking place on 1 September and 1 November.

Against this backdrop, inflationary pressures are expected to heighten in June 2014. We foresee inflation of 0.55 percent MoM, translating into YoY inflation of 6.82 percent.

At its latest meeting, Bank Indonesia left its benchmark BI rate unchanged at 7.5 percent, with the Lending Facility and Deposit Facility rates stable at 7.50 percent and 5.75 percent, respectively. The prospect of rising prices in the near term coupled with the need to keep the trade deficit in check are the main considerations for the central bank in determining its interest rate policy. In April 2014, Indonesia’s foreign trade posted a large deficit of US$ 1.9 bn, after recording surpluses in the previous several months. Given these considerations, we still expect BI to maintain the benchmark rate at its current level.