Inflation Outlook November 2007

13 11 2007

After rising by 0.80% in September 2007, October inflation came in at 0.79% MoM. As such, on a YoY (year-on-on-year) basis, prices rose 6.88% in October from 6.95% in September.

Prices rose in all components of the CPI. The biggest increase was posted by the clothing component (up 2.05%, significantly higher than its level in September of 1.22% MoM), followed by the foodstuffs component (up 1.87% vis-à-vis 1.81% in September), the processed foods component (up by 0.51% vis-à-vis 0.45% in September), the transportation component (up by 0.47% vis-à-vis 0.07% in September) and the housing component (up from 0.18% to 0.21%). However, inflation was lower in the medical care component (down from 0.45% to 0.44%), the education component (down from 1.70% to 0.21% MoM) and the housing component (down from 0.1% to 0.23% MoM).

Inflation Forecast November 2007

The October inflation rate was slightly lower than our expectation of 0.87%, but the rate was comparatively high due to the seasonal factors of Ramadhan and the Lebaran holiday period. As expected, the foodstuffs component, the processed foods component and the transportation component all rose. Note that in the transportation industry, the government gives permission to some transportation companies to hike their fares significantly a few days prior to and after the Lebaran festivities.

Looking ahead, we expect the month-on-month inflation figure to ease in November. It appears that the upward pressures on foodstuffs prices and the transportation component are likely to decrease in this month. With more than enough rice stocks due to the scheduled rice imports since the middle of the year, prices will tend to decline by the end of 2007.

Against this backdrop, we predict that inflation will reach 0.36% MoM in November 2007, with the YoY inflation rate declining to 6.90%.

In light of high inflationary pressures in October, Bank Indonesia held its benchmark rate at 8.25% in early November. With a relatively high level of inflation by the end of this year, we still do not expect the central bank to ease its monetary policy further in early December given that the central bank has formally adopted an Inflation Targeting monetary policy framework. As such, we expect the central bank to maintain its benchmark rate at the current level of 8.25% in December. The central bank may start to ease its monetary policy further in January 2008.

In January 2008, the gap between inflation and interest rates is expected to be wider. Moreover, the relatively stable rupiah should also reassure the central bank that cuts in its benchmark rate are feasible. Thus, with the prospect of relatively benign inflation, the central bank may cut rates in January 2008, we believe. Full Report


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