In line with expectations, Indonesia's inflation rate accelerated in February 2017, particularly due to higher prices in the category "housing, water, electricity, gas and fuel". On Tuesday (01/03) Statistics Indonesia announced that Indonesia's annual headline inflation rose to 3.83 percent (y/y), up from 3.49 percent (y/y) in the preceding month. On a monthly basis, Indonesian inflation was recorded at 0.23 percent (m/m), the highest monthly February inflation figure since 2014.

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Bank Indonesia, the central bank of Indonesia, is concerned that the ongoing flooding that occurs in several regions of the country will give rise to inflationary pressures as some distribution channels are blocked. Besides logistics issues, severe rainfall can disturb harvests hence impacting negatively on the supply-side. In several parts of Indonesia, including the capital city of Jakarta and the northern part of Central Java, there are reports of major floods.

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On 5 February 2017, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve political, social and economy-related topics such the Jakarta gubernatorial election, Indonesia's GDP growth, inflation, manufacturing activity, the investment climate, palm oil, coal, and much more.

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The International Monetary Fund (IMF) is optimistic about economic growth of Indonesia in the foreseeable future. In its latest report the Washington-based institution says Indonesia's solid economic policies and increased household consumption support strong growth. The stronger rupiah and low inflation have caused people's purchasing power to strengthen. This is a major positive boost for the economy as household consumption accounts for more than 55 percent of total economic growth in Southeast Asia's largest economy.

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We already expected Indonesia's inflation rate would be high in January 2017 due to higher food prices as well as higher administered prices (electricity tariffs, fuel prices and vehicle registration fees). However, inflation realization in the first month of 2017 exceeded our expectations. Indonesia's statistics bureau (BPS) announced around noon on Tuesday (01/02) that the nation's monthly inflation accelerated to 0.97 percent (m/m) in January 2017, while annual (headline) inflation rose to 3.49 percent (y/y).

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Indonesia's consumer price index is expected to rise in January 2017 amid higher food prices and higher government administered prices. Indonesian inflation in the first month of 2017 is estimated in the range of 0.60 - 0.70 percent month-on-month (m/m). Accelerating inflation in Southeast Asia's largest economy would imply that Indonesia's central bank (Bank Indonesia) has limited room to ease its monetary policy (by cutting the benchmark interest rate).

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Eric Sugandi, Chief Economist at SKHA Institute for Global Competitiveness (SIGC), believes household consumption will remain the main engine of economic growth in Indonesia in 2017, followed by the other engines, namely direct investment and government spending. Regarding household consumption, Sugandi says the middle class contributes significantly to economic growth of Southeast Asia's largest economy due to their robust consumption. Traditionally, household consumption accounts for between 55 and 58 percent of Indonesia's gross domestic product (GDP).

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Indonesia's Deposit Insurance Agency (LPS) expects Indonesian inflation to reach 4.7 percent year-on-year (y/y) in full-year 2017, just within the central bank's 3 - 5 percent (y/y) inflation target. Didiek Madiyono, Executive Director of the LPS, said administered price adjustments will be the primary reason why the inflation rate of Indonesia will accelerate from 3.0 percent (y/y) in 2016 to 4.7 percent (y/y) in 2017. Administered prices are those prices that are set by the government. Usually when the government changes its subsidy policies, it needs to adjust certain prices.

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Most analysts and government officials see Indonesian inflation accelerating this year after a mild 2016 in which Indonesia's consumer price index rose by 3.02 percent year-on-year (y/y) only. Indonesian Chief Economics Minister Darmin Nasution said low inflation in 2016 was primarily caused by low administered price growth (in a couple of months administered prices in fact fell last year) as well as controlled food prices. He added, however, that food prices have been rather volatile and are expected to remain volatile in 2017.

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According to the latest data from Indonesia's Statistics Agency (BPS), full-year inflation reached 3.02 percent in 2016, just within the 3 - 5 percent year-on-year (y/y) target range that was set by the central bank of Indonesia (Bank Indonesia). The 3.02 percent growth was the lowest annual inflation figure of Indonesia since 2012. In December 2016 Indonesia's consumer price index rose by 0.42 percent month-to-month (m/m), one of the lowest monthly (December) growth paces over the past decade.

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Last week, I discussed the composition of the ten largest Indonesian companies by market capitalization. For this week's column I have decided to zoom in on the performance of Indonesia's main stock index (IHSG), which has been highly volatile in the last week. It seems like its trend for the upcoming short-term has changed from an upward into a sideward trend. While the Dow Jones Index has been setting new records, the IHSG is showing some signs of fatigue.

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Rising American stock indices on Wednesday provided solid support for stock indices around Asia the following day, including Indonesia's main index (IHSG). Amid this global positivity, market players were eager to add stocks to their portfolios. News from Japan, China and the Indonesian central bank's announcement to maintain its low benchmark interest rate were well-received, particularly by domestic market players. It made the IHSG rise to 4,924.26, a 0.96 percent gain.

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The central bank of Indonesia (Bank Indonesia, or BI) decided to maintain its record low policy rate for the 15th straight month at 5.75 percent as it is considered consistent with its inflation target range of 3.5-5.5 percent in 2013 and 2014. The central bank also stated that the global economic recovery is accompanied by many uncertainties which result in a lower forecast for Indonesia's economic growth. The full press release of Bank Indonesia can be read below.

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In its most recent report, the Asian Development Bank (ADB) forecasts Indonesia to continue its robust economic growth. Last year, the economy of Indonesia expanded 6.23 percent, and according to the ADB this figure will rise to 6.4 percent in 2013 and 6.6 percent in 2014. However, since the start of April there have been some issues that are causing Indonesia's stock indices to go down. Although believed to be only temporary, it is worth taking a closer look.

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Various high government officials, including president Susilo Bambang Yudhoyono, Finance minister Agus Martowardojo and National Development Planning minister Armida Alisjahbana stated that Indonesia's economy is estimated to grow between 6.3 and 6.8 percent in 2014. Its main economic pillars of support are thought to be (foreign and domestic) investments, domestic consumption, and government expenditure. Poverty is targeted to be reduced to ten percent of the population.

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The Indonesia Stock Exchange (IHSG) experienced a mixed week. At the start of the week, the index rose, but towards the end of the week it weakened, although ending in the green on Friday. Recently, the IHSG has hit record levels, and this makes market participants worried that the index might fall in case there emerge negative market sentiments. These concerns are what made the index turn away from the next psychological boundary: 5,000 points.

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Usually, news about inflation is not well-received by market participants. Particularly when inflation turns out to be higher than expected. This time, however, something interesting happened in Indonesia. Although the country's March inflation rate was high (5.90 percent year-on-year), it was not followed up by a negative response of market players. In fact, the inflation rate seems to have strengthened the Indonesia Stock Exchange (IHSG), which gained 0.40 percent on Tuesday.

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With a number of important global stock exchanges still closed due to Easter, it seemed that the Indonesia Stock Exchange (IHSG) lacked a reference point to which it could cling. It is also likely that market participants have already consumed most of the 2012 corporate company reports and are therefore not waiting for new data of listed companies. Moreover, today's announcement of the relative high inflation rate of March did not support the IHSG either.

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Yesterday, Statistics Indonesia (BPS), a non-departmental government institution, released Indonesia's export and import numbers of February 2013. Indonesia's imports reached US $15.32 billion, while its exports stood at US $14.99 billion. It has thus resulted in the continuation of a trade deficit (US $327.4 million). For Indonesia, which always reported trade surpluses until last year, it is a worrying scenario as the trade deficit and higher inflation put pressure on the IDR rupiah.

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This week, the World Bank published its Indonesia Economic Quarterly (IEQ, edition March 2013) titled 'Pressures Mounting'. It reports on key developments over the past three months in Indonesia’s economy, and places these in a longer-term and global context. To read the whole report, please visit the World Bank's website at www.worldbank.org or download this edition directly through this link. Below we present the executive summary.

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