Indonesia's government faces pressure amid soaring inflation

Inflation rate jumped 5.3% in February.

According to Nomura, CPI inflation jumped 5.3% y-o-y in February from 4.6% in January (Consensus and Nomura: 4.8%) putting it well within reach of the upper limit of Bank Indonesia‟s (BI) 3.5-5.5% target. The increase was largely due to higher food prices (10.3% from 7.3% in January) given the seasonal fluctuations ahead of the harvest season in March and April.

The housing component also noted a significant increase in inflation to 3.9% y-o-y in February from 3.4% on upward electricity tariff adjustments in January. Core inflation, which excludes food and energy prices, was stable at 4.3% y-o-y in February.

Although food inflation could moderate in the coming months, further electricity tariff adjustments slated for April, July and October will add further upward pressure.

This, combined with strong domestic demand, the lagged impact of IDR depreciation and elevated inflation expectations will continue to feed through into higher inflation, in our view.

This will put additional pressure on BI to act, especially as weak external balances persist, as reinforced by January‟s trade numbers.

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