The following is a research note from Helmi Arman, Economist, Asia Pacific Economic & Market Analysis, Citi Research

CPI inflation in Nov came down further to 8.3% YoY (0.09% MoM), from previously 8.4% — Food prices pulled-back MoM after surging, especially chicken meat as well as onions (due to harvest). Core inflation was relatively stable at 4.72% YoY. However had gold prices not fallen, we estimate core would have risen towards 4.8 – 4.9%. Looking forward to YE13, we still expect core to inch up towards 5% although our 8.8% headline forecast may have some downside risk. 

Imported inflation is rising, but the extent has been relatively mild — We have already seen inflation in recent months on gold and some foods e.g. chicken which are grown with imported animal feed. However the magnitude of imported inflation overall appears to have been less than we initially expected. Inflation in the wholesale price index of imported goods, for example, has increased to only to 8% YoY as of September, lower vs. IDR/USD depreciation of 21% YoY.

 So where is all the imported inflation? — We refer back to our 30-Jul note, Indonesia Macro View - Assessing the Impact of IDR Depreciation . FX pass-through is not just a function of IDR/USD movements but also the direction of the dollar price of global commodities, as well as nominal effective exchange rate movements. Firstly, we see that the dollar prices of some relevant imported commodities as of October are down by more than 5% YoY. Secondly according to BIS data, the IDR depreciation on a trade weighted basis has been 12% YoY, which is much lower than the bilateral IDR/USD depreciation. Thirdly, there is also a possibility that the adjustment of selling prices is occurring with a lag as companies had already stocked up on supplies in Jun-July (judging from the rise in raw material imports at the time). 

From a policy perspective: Lower inflation not a reason to turn dovish — In our view, if BI’s priority now is to bring-back the current account deficit back to sustainable levels (in the broader context of safeguarding financial & macroeconomic stability), then an increase in cost-push inflation is actually not a bad thing because it will help anchor domestic demand growth. Conversely the lack of cost-push inflation may not be a good thing as it sustains purchasing power and domestic demand growth. In the current environment, the inflation that policymakers should view as undesirable, in our view, is only demand-pull inflation. (And fortunately there has been good news today as the Jakarta government only set a 10% hike in minimum wage for next year, vs. 40% this year.) In all, we think the decline in YoY inflation this month does not represent a reason for policymakers to turn dovish.