Indonesia Inflation Outlook Oct 2007

31 10 2007

To Remain High

In September 2007, the consumer price index (CPI) rose 0.80% MoM (month on-month), after rising 0.75% MoM in August 2007. As such, the YoY (year-onyear) inflation rate rose to 6.95% in September from 6.51% in August.

Prices rose in all components of the CPI: the foodstuffs component rose by 1.81% MoM, the education component by 1.70% MoM, the clothing component by 1.22% MoM, the processed foods component by 0.45% MoM, the medical care component by 0.44% MoM, the housing component by 0.18% MoM, and the transportation component by 0.07% MoM.

The inflation figure in September was slightly above our expectations (we had expected inflation in September to reach only 0.62% MoM). While we had anticipated the significant increase in the education component (due to the beginning of the new academic year for universities) and in the clothing component (due to the impact of Ramadan), the increase in the foodstuffs component was greater than expected. Besides the impact of Ramadan, we also believe that hikes in toll road tariffs and surging cooking oil prices have given traders an excuse to jack up their selling prices to an excessively large degree.

Looking ahead, we expect the month-on-month inflation figure to remain high in October. Seasonal factors are likely to continue putting upward pressures on general prices in this month. Note that prices typically rise over the Ramadan and Lebaran period due to the strong demand for foodstuffs, prepared foods, and clothing. In addition, prices in the transportation component are likely to tick up in October since transportation companies are allowed by the government to hike their fares several days prior to, as well as after, the Lebaran festivities.

Against this backdrop, we predict that inflation will reach 0.87% MoM in October 2007, with the YoY inflation rate rising to 6.96%.

Over the next several months the year-on-year inflation figure is likely to hover close to 7.0 percent. We still believe, however, that there is a good chance that the year-on-year inflation figure shall fall significantly in December to around 6.25%. Note that in December 2006 there was an upward shock from rice prices due to the extended dry season. Thus, if the government can anticipate rice scarcity this year (should a extended dry season take place) and import rice several months in advance, then a similar shock should be avoided. Indeed, signs are that the government has already started to import rice in various qualities several months in advance. As such, a rice price shock is not likely to occur in December. We therefore expect a rather sharp downward adjustment in the year-on-year inflation figure in December. CPISBIOutlook-Oct07


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