Indonesia's CPI inflation break forecasts as it hit 7.2%

It's the highest in a year.

According to DBS, CPI inflation came in at 7.2% (YoY) in May, higher than their expectations of 6.9%. It is also the highest in about a year, except for the temporary spike in Dec14.

Food inflation surged above 8% in the month, partly due to seasonal effects ahead of the start of the Ramadan.

Here's more from DBS:

Looking ahead, we expect CPI inflation to peak in June, barring any sudden spike in global crude oil price or a significant weakening of the rupiah going forward.

Not that CPI inflation will ease back towards 6% anytime soon though. Uncertainties of crude oil price and the sustained weak sentiment on the rupiah will continue to support underlying inflationary expectations.

Average CPI inflation was at 6.4% in both 2013 and 2014. It may remain thereabouts in 2015, rather than the 6% that we currently forecast. And even if CPI inflation maybe below 5% by Dec15, it will only prove to be a one-off, given the high base effects from last year.

High inflationary expectations may put some pressure on consumption growth ahead. This will prove to be quite a task for policymakers, especially considering that GDP growth momentum has also slowed down quite markedly in the past
2-3 quarters.

It is important that Bank Indonesia (BI) refrain from switching gear to a loose monetary policy too soon though. Sentiment on the rupiah will onlyget worse should BI choose to deliver further rate cuts.

This may only heighten the inflationary threats while the positive impact on GDP growth is questionable.

It is time for the government to be on the driver’s seat in spurring economic growth. There needs to be better efforts to prevent the economy from a downward spiral. The government is committed to accelerate government projects in
June-July. Delivery is always key.

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