Indonesia inflation predicted to slip to 5.6% in April

Down from its 22-month high record.

According to DBS, headline inflation is expected to ease to 5.6% YoY in April, from a 22-month high of 5.9% in the preceding month.

In the immediate term, food prices will be critical to watch. Notably, food price inflation, exacerbated by import policies, reached 12.9% and has been the single largest factor pulling up inflation.

Here's more from DBS:

However, with signs that food prices may be stabilizing, the sequential pace of inflation growth is likely to slow. Going forward, the inflation trajectory will be heavily dependent on the government’s fuel price policies.

Our core scenario anticipates no change in subsidized fuel prices and a significant tapering off on food prices, thereby leading to an average inflation rate of 5.3% this year.

With recent government rhetoric heavy on subsidy cutting, we have also examined two alternate scenarios and their likely impact on inflation, growth and rate policies.

Under the first scenario, subsidized fuel prices are hiked by IDR1000/liter across the board in May. This would lead to inflation averaging around 6.8% in 2013, but the impact on GDP growth should be negligible (a larger price hike was in place in 2008 but there was no impact on consumption).

Under scenario two, motorcycle owners are allowed to continue using subsidized fuel at IDR4500/liter, but private cars will see prices rise to IDR6500/liter.

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In this case, average inflation is expected to reach 6.1%. 0.1-0.2pct-pt of GDP would also be shaved off our current 2013 forecast of 6.3%. The slightly lower GDP growth figure reflects a knee-jerk reaction in the immediate months on car sales.

However, the impact is not likely to last due to rising income over the past few years. Moreover, car owners are relatively more well-to-do and can probably better cope with higher fuel prices.