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Stock Index
Bahana Securities

23 Oct 2019 | 18:03 WIB
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Bahana Securities

23 Oct 2019 | 18:03 WIB
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Low inflation favourable for rupiah

Beating ours and market expectation (Bahana: 0.10% m-m, cons: 0.16% m-m), price index dropped -0.05% m-m or rose 6.83% y-y (Aug: 7.18% y-y driven by staple foods deflation at -1.07% m-m or 8.26% y-y inflation in September (Aug: 9.26% y-y). Prices of poultry products, red chillies, air transportation, red onions, cooking oil, fuel and eggs reported some price drops during September. Some price cut from state electricity company also added favorable number to energy inflation at -0.26% m-m or 12.55% y-y (Aug: 14.47% y-y), administered price inflation at -0.40% m-m or 11.26% y-y (Aug: 12.32%) and transportation inflation at -0.40% m-m or 8.00% y-y (Aug: 8,17% y-y). Higher prices still occurred for rice, education spending, gold jewelry, carrots, cigarettes and housing rentals. We suspect continued rising rice price is an impact of El Nino season.

Higher core inflation is the impact of continued fast IDR depreciation (Sept: 4% m-m). However, the increasing pace of m-m core inflation was prevented by economic slowdown as m-m core inflation is only at 0.44% m-m (Aug: 0.52% m-m). Recent BI action on tackling IDR depreciation should limit the October core inflation prospect. This should bode well for the strength of our local currency as the IDR has the propensity to track CPI. 

At the wholesale level, price index also dropped 0.05% m-m or 10.38% y-y triggered by -0.22% m-m fall on non-oil and gas export price index. However, the building material price index still increased 0.15%. We suspect imported inflation played its role here.

At this stage, we expect decreased electricity prices by 1.08-1.11% m-m in October could continue to push energy inflation in negative trajectory this month. Recently, the government's third economic stimulus package already cut subsidized diesel price to IDR6700/liter (-2.8% m-m), although regular gasoline, RON88, stays at IDR7,400/liter. Additionally, we will have an LPG price cut sometime in January next year. Overall, we expect October inflation to remain low at 0.02% m-m, translating to 6.36% y-y inflation. 

With that said, continued low inflation should minimize the impact of IDR depreciation and weak economic growth by fostering greater purchasing power.

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