Ahead of the Ramadan month (set to start in early June) inflation is under control in Indonesia. The holy Islamic fasting month - despite being a month of self control - always triggers rising consumption in Indonesia on items such as food, clothes, bags and shoes (hence triggering inflationary pressures) and therefore authorities are particularly eager to safeguard the country's inflation pace (especially food prices) ahead of - and during - the Ramadan (and subsequent Idul Fitri celebrations) as a minor peak in inflation can push many of the country's millions of near-poor into full poverty (in recent years several of the government's failed food policies - for example regarding beef imports - in fact led to high inflationary pressures).

The latest data from BPS show that Indonesia's consumer price index eased to 3.33 percent (y/y) in May 2016, the nation's lowest annual inflation level since December 2009, and down from 3.60 percent (y/y) in April 2016. The current level of inflation is also comfortably within the central bank's target range of 3 - 5 percent (y/y) in 2016. Controlled inflation was partly reason behind Bank Indonesia's loosening monetary policy. In the first three policy meetings of 2016 the central bank cut its benchmark interest rate (BI rate) by 75 basis points to 6.75 percent (in August 2016 this key BI rate is set to be replaced by the seven-day reverse repurchase rate, currently at 5.5 percent).

Bank Indonesia may have room to cut the BI rate further at the June policy meeting although this would also imply that existing pressures on the rupiah rate (amid heightening speculation of another Fed Funds Rate hike) increase. The rupiah has weakened 2.8 percent from IDR 13,295 per US dollar to IDR 13,671 over the past two weeks (Bloomberg Dollar Index) and this may curb Bank Indonesia's appetite for another interest rate cut.

Bank Indonesia's benchmark rupiah rate (the Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.41 percent to IDR 13,671 per US dollar on Wednesday (01/06).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Meanwhile, Indonesia's core inflation - which excludes volatile food and administered prices (including subsidized fuels and electricity billing rates) - was unchanged at 3.41 percent (y/y). Calendar year inflation (January-May 2016) reached 0.40 percent (year-to-date).

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
 Monthly Growth
 Monthly Growth
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%
July          3.29%          0.93%          0.93%
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
(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

Manufacturing Activity Indonesia in May 2016

Indonesia's manufacturing activity, however, slightly eased in May 2016. The Nikkei Indonesia Manufacturing PMI fell from a reading of 50.9 in April to 50.6 in May (a reading above 50.0 indicates growth in manufacturing activity, while a reading below 50.0 indicates contraction). The decline was attributed to slowing expansion in incoming new work and unchanged production volumes (stagnating after two months of growth). Meanwhile, stocks of finished goods surged at the second-highest pace since the survey began.

Easing manufacturing activity in Indonesia as seen in May does make investors and analysts a bit nervous considering Indonesia had just ended a 17-month streak in manufacturing contraction two months ago. Markit Economist Pollyanna De Lima remains optimistic, however, as Indonesian businesses continued to employ additional workers, while scaling up their buying activity to the highest level since July 2014. This would suggest that they expect to see a pick-up in demand.

Indonesia Manufacturing PMI: