June CPI inflation is likely to stay above Bank Indonesia' expectation

Indonesia's inflation rose modestly to 7.26% y/y in June (May: 7.2%; Apr: 6.8%). The inflation rate is below the market expectations (7.4%). 

On a sequential basis, prices rose 0.54% m/m (May: 0.5%; Apr: 0.36%), largely reflecting higher food prices on the back of the Ramadan fasting period, which began on 18 June. As a result, food prices rose 8.6% y/y in June, up from 7.9% y/y in May, and 6.3% in April. Apart from food, prices of most items and services are rising at a stable pace. As such, core inflation held steady at 5.0% for the sixth consecutive month. Given the risks of higher food prices on the back of the warmer and drier weather as well as the ongoing Ramadan festival, Barclays forecasts infaltion rate for 2015 at 6.1% and growth rate at 5.1%. 

"The inflation is likely to stay above the BI's target range in Q2 and Q3, with the rate falling to 6.4% in Q3, and then to re-enter the official target range of 3-5% only in Q4. We think the central bank is likely to draw greater comfort from news that the government is speeding up infrastructure spending, which should drive growth in H2. To us, the growth dividend from infrastructure spending will make a significant contribution from 2016 onwards, but will keep growth in 2015 marginally above 5%", according to SocGen.