Here's why Indonesia must brace itself for inflation spikes

It is pegged to hit 5.2% in March.

According to DBS, trade and inflation data will be watched to monitor overheating risks in the economy. Inflation is expected to reach 5.2% YoY in March, just a notch below the 5.3% registered in the preceding month.

Food prices have been elevated over the past few months, driven in part by weather conditions and import policies.

This component of CPI rose by 10.3% YoY in February, about double that of the headline figure. Going forward, inflation is likely to trend higher.

Here's more from DBS:

Firstly, uncertainty about the subsidized fuel policy is already stoking higher price expectations. Further delays on policy direction can easily lead to price markups across consumer goods.

Moreover, the rupiah has generally been on a weakening trajectory over the past year. The feedthrough of higher commodity prices is likely to show up in the inflation numbers.

The trade deficit has narrowed from USD 1.9bn in October to USD 0.2bn in January and we think that an uneven recovery is underway amid a moderate rebound in commodity prices.

The trade deficit is largely cyclical in nature and became apparent only when coal and palm oil prices stay depressed through the last few quarters.

To be sure, investment-led growth and robust domestic consumption have also led to elevated import growth, but this structural issue just means that the trade surplus cannot be as large as it was several years ago.

Low subsidized fuel prices have also been put up as a reason why the trade balance dipped into deficit territory, but this is true only to an extent.

Breaking down by commodities, the most discernible drop came from the fall in non-oil and gas trade surplus, which fell from an average of USD 2.1bn a month in 2011 to an average of just USD 0.3bn over the last 12 months ending January 2013.

By the same measure, the oil balance (crude oil and oil products) only showed a marginal deterioration of USD 0.3bn. Clearly, elevated oil imports are not the main driver of the trade deficit.

For February, export and import growth are projected at -1.2% YoY and 4.6% YoY respectively.

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