Why Indonesia's inflation easing streak may end

Inflation will spike up again when government imposes higher electricity tarrifs and tweaks fuel subsidies.

If implemented, these changes should push up inflation, which has been slowing down since September last year, according to an inflations comment from OSK-DMG.

Here's more from OSK-DMG:

Headline inflation slowed for the fifth straight month, rising 3.7% year-on-year (yoy) in Jan 12 following Dec’s 3.8% increase. This was higher than market expectations (3.6%) but lower than our estimates (3.9%). Core inflation also eased in Jan, rising 4.29% yoy as compared to 4.34% in Dec, but still sticky above the 4% level.

Food prices and transport cost both eased by 3.29% and 1.84% yoy in Jan from 3.64% and 1.92% respectively in Dec, while processed food and housing cost rose by a faster 4.68% and 3.53% yoy in Jan from 4.51% and 3.47% respectively in the previous month.

The slowing trend in inflation should allow Indonesian policy makers to focus their energy on growth concerns rather than inflation. However, the threat of inflation remains in Indonesia especially with the government’s plans to raise electricity tariffs and make adjustments to fuel subsidies.

We continue to expect inflation to average 6.0% in 2012 as a result. Thus, we think it would be wise for the central bank to hold off on further cuts to the policy rate until there is further clarity on the government plans, and to also allow the previous cuts to work their way into the economy.

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