Indonesia: CPI (Aug 11) and Trade (Jul 11) - BNPP

Key Facts
‰ Inflation rose by 4.8% y/y in August up from 4.6%y/y in July.
‰ Food prices rose by 5.84% y/y in August up from 5.21% y/y in July.
‰ Core CPI rose 5.15% y/y in August, quickening from 4.55% y/y in July.
‰ July’s exports continued to grow at a robust pace, up 40% y/y from 49% in June.

While inflation picked in August, it remains within our expectations. The faster pace is due to the seasonal effect of Ramadan festivities. We expect BI to keep the policy rate at 6.75% for the remainder of the year.

The pick up in inflation with the CPI rising 4.8% y/y in August was in line with a seasonal rise in food prices given the Ramadan festivities. This was above market
expectations of a 4.7% y/y increase but below our 4.9% y/y forecast. On a m/m basis inflation rose 0.93% in August up from 0.67% in the previous month. Inflation in August on a y/y basis continues to be well behaved, coming from high base effects of a rise in chilli prices in 2010 – well within BI’s inflation target of 4-6% in 2011.

As previously argued, there are three key reasons for our more sanguine view of inflation in Indonesia. First is the strength of the IDR which helps to dampen
imported inflation. Foreign reserves reached a new peak of USD 122.7bn in July. which should continue to underpin the IDR and help keep imported inflation
at bay. Second, the economy is not overheating as evidenced by our output gap analysis which shows the economy running near trend. Third, the government has repeatedly argued food inflation is unlikely to accelerate this time round given its rice harvest will be ample and the build-up in its stockpile of rice following massive purchases of rice from neighbouring Thailand and Vietnam. The country is
expecting its first cargo of rice from Thailand in September to ease upward pressure on food prices. Food prices rose by 5.84% y/y in August, higher than
the trough of 5.21% y/y in July due to Ramadan when traders raise prices.

Notably, core inflation rose to 5.15% y/y in August, higher than the 4.55% y/y recorded in July. This wasa 1.1% m/m increase, the largest increase since June
2008. While the y/y rate is above the 5% threshold set by BI earlier, this was largely due a rise in gold jewellery prices. This large increase to core inflation is likely to be one off once the annual festivities end.

According to BPS data, gold jewellery was the highest sole contributor to inflation, contributing around 4.5% of the increase in the consumer price index in July. Gold rose 10% in August, according to statecontrolled gold miner Antam. The end of the festivities should see domestic prices of gold coming off in the
coming months according to government officials.

On the external front, July’s exports rose by a robust 39.5% y/y against 27.2% y/y for imports. The result is the trade balance recorded a surplus of USD 1.4bn in
July or USD 16.4bn in the first seven months of the year. This compares with just USD 9.4bn in the same period a year ago. We believe the robust export growth is a reflection of both the country’s buoyant commodity exports and labour-intensive exports as investments in the latter come on stream and translate into higher output. Meanwhile, the domestic economy continues to hum along at a healthy clip as
evidenced by rising non-oil imports such as iron and steel materials used in construction, vehicle auto parts for domestic consumption and machinery parts.