Indonesia: Inflation pressures and policy path – DBS

DBS Group Research economist Radhika Rao notes that Indonesia’s May inflation accelerated on higher food and energy costs but remains within Bank Indonesia’s target band. She highlights weather risks, Rupiah weakness and a shrinking trade surplus as key concerns. The report stresses that absent fuel price adjustments, higher global prices could pressure the trade and current accounts, and expects further domestic rate tightening by BI this year.

Inflation quickens as trade surplus shrinks

"Indonesia’s May inflation quickened to 3.1% yoy from 2.4% on higher food and energy pressures in the month, despite steady pump prices."

"Put differently, price adjustments in market-driven i.e., volatile segment (cooking oil, chillies, etc.) rose sharply to 6.2% yoy vs 3.4% the month before, besides an uptick in administered and energy sub-indices."

"Headline inflation is still within the BI’s target of 1.5-3.5%, although nearing the upper end, with a breach likely if the West Asia conflict prolongs."

"Out concurrently, April trade surplus shrank to $89mn vs $3.3bn in Mar, the smallest in nearly six years, following a surge in crude oil (up 67.5%) and refined fuel (88%) imports."

"Without fuel price adjustments to temper demand, higher global prices and a weak rupiah are likely to weigh on the trade balance and, consequently, the current account math."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)