Indonesia CPI Review: Ramadan Demand Drives Up Inflation
Indonesia's latest Consumer Price Index (CPI) data has revealed a notable acceleration in inflation, surpassing expectations and marking the highest rate since August 2023. The surge, driven primarily by heightened demand during the fasting month of Ramadan, highlights significant price pressures across various sectors of the economy.
Figure 1: Indonesia Consumer Price Inflation and Policy Rate (% y/y)
Source: Continuum Economics
According to data from the statistics bureau, Indonesia's annual inflation rate surged to 3.05% yr/yr in March. This uptick follows February's rate of 2.8% yr/yr, underscoring a pronounced acceleration in price growth. Notably, this figure remains within the central bank's target range of 1.5 to 3.5% for 2024. The price surge was mainly on account of increased during Ramadan, a significant cultural and religious event observed by Indonesia's vast Muslim population.
Volatile food prices experienced a notable uptick, with commodities such as rice, meat, and chicken contributing significantly to the inflationary pressures. Food price inflation stood at 7.5%yr/yr. The core inflation rate also saw an increase, driven by factors such as higher gold jewellery prices and rising housing rental costs. Core inflation came in at 1.8%yr/yr during the month.
In our view, the uptick in price is transient in nature and a potential slowdown in price pressures is anticipated in April. This is also on account of expected upcoming harvest. However, the acceleration in CPI, coupled with a recent report indicating a narrowing trade surplus, may reinforce the central bank's stance on maintaining interest rates in the near term. The current inflationary environment and IDR weakness may prompt a cautious approach. The IDR fell by 0.3% against the US$ today, hitting its lowest level since November 1. Therefore, in our view, Bank Indonesia is likely to maintain interests at-least until Q3-2024. Two small rate cuts of 25 bps are likely over Q3 and Q4 2024.