JP Morgan - Indonesia: August CPI lower than expected despite tariff hike (Sin Beng Ong)

August inflation in Indonesia rose a lower than expected 0.8%m/m, sa and was up 6.4%oya (J.P. Morgan and consensus 6.7%oya).

CPI up on tariff hikes not food - In terms of the overall 0.79%m/m, nsa increase in inflation, 0.4%pts came from higher housing and electricity related costs, which reflects the one-off increase in electricity tariffs in August and encouragingly, 0.2%pts came from food prices, against increases of well over 0.7%m/m, nsa in the previous two months (first chart).

The increase in electricity tariffs is not expected to be persistent and should roll off in the coming months, as has been the case in recent history. The moderation in food prices in August likely reflects the impact of beginning of Ramadan and also from the impact of BULOG’s efforts to ease food prices. Thus, while food prices were lower in August, the real test will be in September and October.

Watching food prices in September/October - Lebaran, which falls on September 10, tends to lead to one-off increases in food prices which fades in the subsequent month. The real test will be whether food prices indeed moderate in October after Lebaran. The J.P. Morgan forecast assumes it will, since by that time adverse weather effects are expected to have eased and also that the rice harvest in 3Q10 should provide some offset.

Underlying inflation modest so far - Importantly, despite the increase in headline inflation, core inflation has remained modest and this should keep the central bank on hold through 2010. Moreover, non-food inflation remains modest despite the increase in food prices which suggests that food inflation has not widened into broader prices. At a broader level, WPI inflation in Indonesia tends to be a leading indicator for underlying inflationary pressures and while WPI has recently risen, it still remains low and should not feed into broader CPI (fourth chart). Also importantly, the recent stability of the IDR has also likely helped anchor inflation transmission and the forecast for a slow but steady appreciation of the IDR should keep the inflation pass through modest.

BI expected to remain on hold through 2010 – Given the expectations above for modest core inflation, there would be little need for the central bank to raise rates in 2010.