Indonesia’s inflation accelerates in January on rises in administered prices, likely to rise significantly in 2017

Indonesia’s headline inflation accelerates in January, owing to rises in administered prices. The consumer price inflation rose to 3.48 percent year-on-year in the month, as compared with market expectations of 3.20 percent and December’s print of 3.02 percent. The rise in inflation is mostly because of the average 100 percent increase in vehicle registration certificates and the phased removal of electricity tariffs that led to prices of 900VA segment to rise 32 percent, noted ANZ in a research report.

Prices of food are also expected to have risen because of heavy rainy season and the Lunar New Year celebrations that took place in January 2017. Meanwhile, core inflation also accelerated in the month, rising to 3.35 percent, as compared with December’s print of 3.07 percent and market expectations of 3.12 percent.

Inflation in the country is expected to accelerate further significantly in 2017, especially because of the phased removal of electricity tariff subsidies. Moreover, fuel prices that have yet to increase might also be increased if global oil prices continue with their upward trend. Food prices are also set to push tradable inflation higher. Moreover, a rebound in domestic demand is expected to put upward pressure on inflation, which is evident in the strong core CPI print for January.

“Taking these dynamics into account, we forecast inflation to average 4.6% in 2017, much higher than 3.5% in 2016. While inflation is on a significantly higher glide path, it will still average within BI’s 3-5% year-end target”, added ANZ.

Higher inflation might restrict policy space for Bank Indonesia to lower rates. On the other side, the central bank is not expected to raise rates in response to administered price adjustments. Hence the BI is expected to stand pat throughout the course of this year, according to ANZ.