ECONOMIC PULSE: Price Indices and Manufacturing PMI September 5, 2017

As food prices, such as fish and vegetables fell post-Ramadan, Indonesia’s annual headline inflation rate slowed slightly to 3.82% (Y/Y) in August from 3.88% (Y/Y) in previous month, beating the expectation of 3.95%. On a monthly basis, the headline Consumer Price Index (CPI) fell 0.07%.

Out of 82 cities being surveyed, deflation occurred in 47 cities while 35 cities experienced inflation. The biggest deflation was detected in Ambon (-2.08%) whereas the highest inflation was found in Lhokseumawe (1.09%).

The annual core inflation rate, which excludes government-controlled and volatile food prices, was at the historical low of 2.98% (Y/Y) in August, compared to the 3.05% (Y/Y) print in July. Government administered prices contracted 0.48% (MtM) but rose 9.31% (Y/Y). The price of volatile items declined 0.89% from previous month and cooled to 1.05% (Y/Y) from 1.13% (Y/Y).

The low inflation rate was a result of steep decline in basic food prices group (-0.67%) and transportation, communication and financial services group (-0.60%).

Within basic food prices group, garlic (-13.7%) gave the biggest contribution to deflation, followed by red onion (-11.8%). Within the transportation, communication and financial services group, transportation sub group saw 0.97% deflation as fares for air transport and inner-city transport came back down.

On the other hand, other groups experienced price hike, led by Education, Recreation and Sport (+0.89%), Clothes (+0.32%) and Food, Beverages and Tobacco (+0.26%).

The headline inflation rate for January – August 2017 stood at 2.53%, in line with Bank Indonesia’s 3% – 5% estimate for this year and even with its 2018 estimate (+/- 3.5%).

Bank Indonesia (BI) took advantage of subdued inflation and a healthy current account deficit outlook to trim its benchmark interest rate by 25 bps to 4.50% last month, the first cut since October 2016. The next policy review will be on Sept. 22 and BI will most likely stand pat with regards to its policy rate although the possibility to surprise us on the downside remains abound.

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