Indonesia's inflation pegged to climb to 6.1%

Blame it on subsidized fuel price hike.

According to DBS, June inflation data and May trade data are on tap today. Headline CPI is expected to spike to 6.1% YoY in June, up from 5.5% in the preceding month. 

The biggest contributor to the jump in inflation numbers lie with the average 33% subsidized fuel price hike that took place on 22 June.

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With slightly more than a week of higher fuel prices in June, the full impact on prices are unlikely to be felt or reflected in the CPI numbers just yet. In the coming months, headline inflation is likely to stay elevated and breach 8% YoY as second round effects start to kick in.

Rupiah weakness is also a concern and could add to imported price pressures. In response,the central bank islikely to signaltighter monetary policy through 50bps hikes in the policy rate in 3Q to 6.50%.

However,the bulk of monetary tightening islikely to take place through the increasesin the FASBI deposit rate overthe medium term.

Trade numbers will be crucialto watch forsigns of external stability. Rising bond yields, rupiah weakness and a correction in the stock market are all signs of jittery investor confidence.

To be sure, this phenomenon is not unique to Indonesia and many emerging economies are having similar occurrences as speculation intensified about Fed tapering in the US.

However, in Indonesia’s case, the dependence on external funding leaves the economy vulnerable to swings in global sentiment. With exports likely to stay under pressure amid lackluster commodity prices, there is a need to moderate domestic demand growth to reduce pressure on the trade account via further monetary tightening.

In May, exports and imports are projected to decrease by 10.5% and 10.9% respectively, implying a trade deficit of USD 100mn.