Lower oil prices to ease inflationary pressure

Arga Samudro
Research Department, Bahana Sekuritas

Following the increase in subsidized fuel prices implemented on 18 November, we expect November inflationary pressure to escalate.  However, given the recent severe drop in oil prices, which should help to bring down other commodity prices, we expect inflationary pressure to be less severe.  

Nevertheless, apart from the direct inflationary impact, we expect second-round effects to come from the fuel-price hike to lead to higher prices of staple foods, processed foods and beverages, as well as transportation tariffs.
Unfortunately, the Trade Ministry’s website no longer publishes staple food price information. However, based on prior fuel-price increases, we expect staple food prices to rise by 1.2% m-m (October: 0.25%).     

At this stage, we believe the November headline CPI should rise 1.15% m-m, translating into a 5.86% y-y increase (October: 4.83%). We also expect core inflation to increase to 4.38% y-y (October: 4.02%), mostly due to the indirect impact of higher subsidized fuel prices.

On the trade front, as shown in exhibit 2, October manufacturing export orders were slightly lower on weaker demand from key trading partners, as the global economic recovery remains unsteady. However, we expect October total exports to remain resilient, reaching USD15.31bn, slightly up 0.35% m-m (-2.3% y-y) mainly supported by a jump in palm oil exports (+45.8% m-m).

Nonetheless, we expect October imports to be lower at USD15.27bn, contracting by 7.75% m-m (-2.6% y-y). This might have been caused by the expectation of higher fuel prices, resulting in weaker-than-expected raw material demand during the period. Thus, we believe the October trade balance will have turned to a slight surplus of USD55m (September deficit of USD270mn).

Post the extraordinary BOG meeting which resulted in a BI rate increase to 7.75% in response to escalating inflationary pressure, we expect the central bank to hold its policy rate at the next BOG meeting on 11 December. The current BI rate level should be sufficient to manage inflationary expectations, particularly given the present backdrop of severely lower commodity prices, pressured by plunging oil prices.