Pay attention to Indonesia's core inflation

Indonesia's November inflation numbers are due this week and it is interesting to compare with what is happening in Thailand and the Philippines. Headline inflation figures have been distorted by changes in oil prices and, in Indonesia's case, the government's decision to raise its subsidized fuel prices in late-2014. A more interesting comparison would be to look at the core inflation numbers. 

In the past two years, core inflation has been on a slight upward trend in Indonesia, unlike in its two neighbours. Not that underlying demand has gotten stronger though, for private consumption growth has actually eased to 5% (YoY) from 5.4% in early-2014. Bulk of the pressure stems from the weak rupiah, as import content of production is high. 

Given steady core inflation, even if CPI inflation were to fall well below 5% by Dec15, underlying inflationary pressures remain prevalent going into 2016. This is another reason that justifies Bank Indonesia's (BI) decision to remain cautious on its policy rate, even if it has shifted to a looser policy stance by lowering the reserve requirement rate earlier this month. BI rate may remain steady at 7.50% for quite some time.