Desirable February deflation; Undesirable IDR weakness

Beating our and market expectations, the country’s February Consumer Price Index (CPI) showed further deflation of 0.36% m-m (January: -0.24%), the lowest level in 15 years. February data also showed y-t-d CPI deflation at 0.61%. We note that the last time, deflation for two-months in a row was recorded in March-April 2011.

With the support of regular fuel price cuts in January, price levels of transportation and staple foods trended down (exhibit 3). Additionally, on a y-y basis, February CPI decelerated to 6.29% (January: 6.96%). Also, lower than market and our estimates, February core inflation slightly slowed to 4.96% y-y (January: 4.99%), despite the negative impact from electricity tariff adjustment and price hike for non-subsidized 12kg-LPG.

Contrary to disinflationary data for January-February showing a 0.6% y-t-d deflation, we expect March CPI to move back into inflation territory. There are two major factors underlining our expectation.

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