Mild deflation is in line with the trend of the past three years. In August 2016 prices in Indonesia deflated 0.02 percent (m/m), in August 2017 prices deflated 0.07 percent (m/m), and now - in August 2018 - prices deflated 0.05 percent (m/m). The theory behind this is that prices are generally still declining after having peaked in June amid the Ramadan and Eid al-Fitr celebrations when consumption traditionally soars in Indonesia, home to the world's largest Muslim community.

August deflation was particularly attributed to easing food prices across Indonesia, including chicken eggs, red onions, chicken meat and chillies.

Despite overall deflation in Southeast Asia's largest economy, there were also some inflationary pressures detected, primarily originating from the education, recreation and sports category. This is primarily caused by the start of the new school year in August, therefore spending on education rises significantly.

Indonesia's August 2018 Inflation per Expenditure Group:

• Foodstuffs; -1.10 percent (m/m)
• Processed food, beverages, cigarette and tobacco; +0.35 percent (m/m)
• Housing, water, electricity, gas and fuel; +0.25 percent (m/m)
• Clothing; -0.07 percent (m/m)
• Health; +0.20 percent (m/m)
• Education, recreation and sports; +1.03 percent (m/m)
• Transportation, communication and financial services; -0.15 percent (m/m).

Read also: Analysis of Inflation in Indonesia

Considering ongoing rupiah weakness with the Indonesian currency depreciating toward IDR 14,800 per US dollar (a two-decade low), we expect imported inflation to rise in the months ahead. In August manufacturers may still have been able to rely on stockpiles that had been purchased earlier, thus there was no need, yet, to raise retail prices on the Indonesian market. However, in the next couple of months we expect a more significant impact of imported inflation amid broad-based US dollar strength.

Indonesia's annual inflation rate rose 3.20 percent (y/y) in August 2018, compared with July's annual inflation rate of 3.18 percent (y/y). Meanwhile, annual core inflation, which excludes prices of government-controlled goods and volatile food products, also edged up to 2.90 percent (y/y) in August, the second month of acceleration.

Year-to-date, Indonesia's inflation has grown to 2.13 percent in the first eight months of 2018. With four more months to go, full-year 2018 inflation is likely to fall within the central bank's target range of 2.5 - 4.5 percent. Since the start of the year Indonesia Investments had its forecast for Indonesia's full-year inflation at 4.0 percent. However, we have decided to (modestly) revise this target to the range of 3.5 - 4.0 percent.

Inflation in Indonesia:

Month M/M Growth
      2018
January      0.62%
February      0.17%
March      0.20%
April      0.10%
May      0.21%
June      0.59%
July      0.28%
August     -0.05%
Year-to-Date      2.13%


Headline Consumer Price Index of Indonesia:

Month M/M Growth
      2013
M/M Growth
      2014
M/M Growth
      2015
M/M Growth
      2016
M/M Growth
      2017
January      1.03%      1.07%     -0.24%      0.51%      0.97%
February      0.75%      0.26%     -0.36%     -0.09%      0.23%
March      0.63%      0.08%      0.17%      0.19%     -0.02%
April     -0.10%     -0.02%      0.36%     -0.45%      0.09%
May     -0.03%      0.16%      0.50%      0.24%      0.39%
June      1.03%      0.43%      0.54%      0.66%      0.69%
July      3.29%      0.93%      0.93%      0.69%      0.22%
August      1.12%      0.47%      0.39%     -0.02%     -0.07%
September     -0.35%      0.27%     -0.05%      0.22%      0.13%
October      0.09%      0.47%     -0.08%      0.14%      0.01%
November      0.12%      1.50%      0.21%      0.47%      0.20%
December      0.55%      2.46%      0.96%      0.42%      0.71%
Total      8.38%      8.36%      3.35%      3.02%      3.61%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank (BI) Target:

  2014 2015 2016 2017 2018
Inflation
(annual % change)
 8.4  3.4  3.0  3.6
BI Target
(annual % change)
 4.5  4.0  4.0  4.0  3.5

 

  2008 2009 2010 2011 2012 2013
Inflation
(annual % change)
 9.8  4.8  5.1  5.4  4.3  8.4
BI Target
(annual % change)
 5.0  4.5  5.0  5.0  4.5  4.5

Source: Bank Indonesia

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