This would mean that the annual inflation pace in Indonesia would ease from 3.21 percent year-on-year (y/y) in July 2016 to around 3.0 percent (y/y) in August. This would be in sharp contrast to annual inflation of 7.18 percent (y/y) that we saw in August 2015 (when inflation was still high after the government's fuel subsidy adjustments, made in November 2014).

According to data from Indonesia's Trade Ministry, there exist some slight inflationary pressures from cooking oil and chili prices in the fourth week of August. Prices of eggs, chicken meat and red onions, on the other hand, have eased, while the price of rice remained stable.

Bank Indonesia's inflation target for full-year 2016 is set at the range of 3 - 5 percent (y/y). However, given the results so far this year, inflation could even fall below 3 percent (y/y) at the year-end provided that there occur no sudden shocks (for example due to the La Nina weather phenomenon).

Low inflation could be a reason for the central bank to lower its benchmark interest rate at the next policy meeting. Meanwhile, core inflation has remained stable at around 3.5 percent (y/y) since the start of the year. However, the Indonesian rupiah is expected to remain volatile due to uncertainty about monetary easing in the USA and this could be a reason for Bank Indonesia to leave its monetary policy approach unchanged at the next policy meeting.

Inflation in Indonesia:

Month  Monthly Growth
          2013
 Monthly Growth
          2014
 Monthly Growth
          2015
 Monthly Growth
          2016
January          1.03%          1.07%         -0.24%          0.51%
February          0.75%          0.26%         -0.36%         -0.09%
March          0.63%          0.08%          0.17%          0.19%
April         -0.10%         -0.02%          0.36%         -0.45%
May         -0.03%          0.16%          0.50%          0.24%
June          1.03%          0.43%          0.54%          0.66%
July          3.29%          0.93%          0.93%          0.69%
August          1.12%          0.47%          0.39%
September         -0.35%          0.27%         -0.05%
October          0.09%          0.47%         -0.08%
November          0.12%          1.50%          0.21%
December          0.55%          2.46%          0.96%
Total          8.38%          8.36%          3.35%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank Target 2008-2016:

   2008  2009  2010  2011  2012  2013  2014  2015  2016
Inflation
(annual % change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4   3.4  
Bank Indonesia Target
(annual % change)
  5.0   4.5   5.0   5.0   4.5   4.5   4.5   4.0   4.0

Source: Bank Indonesia

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