Indonesia Aug headline inflation likely to ease further on distortion in oil prices

Headline inflation in Indonesia for the month of August is expected to ease further, following distortion in crude oil prices, coupled with the fact that t inflation in the housing, utilities and transport components of the CPI remain fairly low.

Indonesia’s consumer price index is likely to show that headline inflation has eased further to 3.1 percent y/y during August. It is increasingly likely that average CPI inflation for the full-year may come in below 4 percent, which would be the lowest since 2012, DBS reported.

However, core inflation is likely to have remained steady at 3.5 percent y/y in August this year. Core inflation has been running at 3.5 percent annual pace for practically the entire year. Even if this is lower than last year’s 4.9 percent, it still suggests that underlying demand has been pretty steady this year.

Headline CPI inflation may come in the lower half of Bank Indonesia’s (BI) official target of 3-5 percent this year. And as headline CPI continues to remain soft, there will be more in the market calling for further monetary policy loosening. As far as underlying demand is concerned, however, there is no big difference between the current state and what it was at the start of the year (as indicated by the trend in core inflation).

In the meantime, BI has trimmed its policy rate by a total of 100bps in the year-to-date. Arguably, the current monetary policy stance is already highly accommodative.