Indonesia's 2013 inflation pegged to hit 5.3%

No thanks to Java flooding.

According to DBS, CPI forecast for 2013 has been revised up to 5.3% (from 4.9% previously) on the back of a sharp spike in food prices (due to flooding in Java) in the first two months of this year. 

Coupled with an adjustment in electricity tariffs and a weak rupiah, headline inflation reached a 20-month high of 5.3% YoY in February.

With the inflation print already close to the top end of the central bank’s (BI) target range of 3.5-5.5%, BI is likely to be more vigilant about price pressures.

Here's more from DBS:

BI may not be willing to tolerate an excessively weak rupiah even as it grapples with the widening current account deficit as higher import prices will translate into higher inflation.

After allowing the rupiah to slide against the greenback in 2H, sizable intervention (as reflected in the fall in foreign reserves) took place in January to help stabilize the currency.

Oil prices pose another key risk although a fuel price hike is not our core scenario. Effectively, subsidized fuel prices have been unchanged since 2005 (the temporary increase in 2008 was reversed by 2009) and the subsidy burden on the budget is rising.

However, the budget has sufficient leeway for moderate deviations in assumptions. Moreover, the authorities are unlikely to risk social unrest just before elections in 2014.