Indonesia economy: Inflation & PMI update
by Fakhrul Fulvian and Sarah Jessica HutapeaWell-contained CPI
§3.07% y-y September inflation spurred by spices and tobacco: September inflation was 0.22% m-m or 3.07% y-y (Bahana: 0.14% m-m; consensus: 0.20% m-m), well contained, helped by food prices at -0.07% m-m or 6.20% y-y (August: 5.1% y-y). The current inflation level is still at the lower range of BI’s estimate (4% +/-1%). In terms of drivers, the largest contributors to inflation were spices (4.35% m-m), communication and delivery (1.26% m-m), fats and oils (1.14% m-m) and tobacco (1.00% m-m). Strong IDR, stable oil prices and unchanged fuel prices on the ground should provide support for low core inflation (exhibit 7).
§September producers’ inflation up slightly at 13.2% y-y: At the wholesale level, local WPI inflation in September was slightly higher at 13.2% y-y (August: 13.0% y-y), led by agriculture at 43.3% y-y (August: 46.7% y-y) and manufacturing at 4.9% y-y (August: 3.9% y-y), while mining was lower at -1.5% y-y (August: -1.4% y-y). On an international-trade basis, non-oil and gas export prices rose 8.7% y-y (August: 5.2% y-y), with non-oil and gas import prices at 3.05% y-y (August: 3.8% y-y).
§Markit statement indicates possible export surprise: Indonesia’s September Markit PMI increased again to 50.9 (August: 50.4) backed by improvements seen for new export orders, output prices and employment (exhibit 8), allowing for new export orders to reach a 46-month high level. The upturn in new orders led Indonesian manufacturers to scale up their output in September. Employment and purchasing levels also increased in September. Overall, the manufacturing sector continued to improve, and we believe that this is a good sign for domestic demand and job creation.
Outlook: Inflation likely to be at the lower range of BI’s target level
On a ytd basis, September inflation of 1.97% is still at a 17-year low. Recently, the government has decided not to cut the subsidized-fuel price in October, despite room for lower prices (exhibit 7), in our view. In October, m-m inflation is likely to remain seasonally low at 0.12% m-m (past-5-year average). Note that volatile food components are likely to deflate on the back of the October harvesting period. At their last meeting, BI clearly stated their intention is to ease the monetary policy further. At this stage, we maintain our expectations of 50bps lower interest rates by the end of the year, which should be supportive of both the equity and bond markets.