Indonesia's inflation hit 8.4% in September

It missed market's expectations.

According to DBS, Indonesia's CPI inflation came in at 8.40% YoY in September, well below market consensus of 9.0%. 

Here's more:

Both the food and transport components of the CPI basket saw a MoM deflation. This does not mean that inflation willstart heading down from here onwards though. Core inflation is currently at 4.7% YoY, highest since late 2009.

Imported inflation will continue to filterinto the economy inthe next couple of months. Many local businesses are still adjusting their prices after the double-digit depreciation ofthe IDR since May.

Still,the September CPI data provides some breathing space forthe BI. While the year-end CPI inflation may still come in around 8.5%, average inflation for 2013 is now likely to be around 7.0%, lowerthan ourforecast of 7.4%.

This is an encouraging piece of news and knee-jerk impactseen in the markets was positive. Even ifthis may prove to be a temporary respite, it will ease some pressure on the IDR. Expect BIto stand pat on rates next week.

Meanwhile,the markets also cheered the unexpected USD 0.1bn trade surplus recorded for August(consensus wasfor a USD 0.8bn deficit). Everyone ignored the factthatthe surplus was only marginal and that August export growth was poor at-6.3% YoY.

A plunge in imports wasthe only reason forthe surplus. Imports grew 11% MoM to a record-high USD 17.4bn in July, driven by front loading ahead ofthe Eid.

A pullback in August(USD 13bn, lowestsince Feb 2011) is hardly an indication that domestic demand is slowing. Expectimport growth to bounce back while relatively weak commodity prices would continue to weigh on export growth. Current account deficitfor 2013 isstill likely to be around 3% of GDP.