Jakarta-based PT Panin Sekuritas, whose Panin Dana Maksima fund has returned an annualized 45 percent over the past five years, noted to Bloomberg last week that inflation concerns were “overstated” and that consumption growth was “likely to hold up” in 2011 even in the face of potential rate hikes.  Jakarta’s Composite index has risen roughly 42 percent this year, making it the best performer among Asia’s 10 biggest indices.  Higher inflation, however, would dampen domestic spending which accounts for roughly two-thirds of output, as would a rate increase–the central bank has kept benchmark rates at a record low at 6.5 percent for 16 months, effectively underpinning demand.   Headline inflation rose to 6.3% y/y in November (from 5.67 in October and exceeding the Bank’s stated target of 4-6% in 2010 and 2011) on the back of higher global food commodity prices which many analysts expect to remain elevated, at least until spring harvesting.  To that extent, the current La Niña weather pattern’s heavier-than-usual rainfall may likely prove a boon to future harvests, meaning a further uptick in inflation may not necessarily force the Bank’s hand.  Analysts with Barclays add that ideologically the Bank is not likely to aggressively tighten policy as it “has a bias to use liquidity management tools rather than the policy rate. This is driven by BI’s concerns that a rate hike would further widen interest rate differentials and attract additional ‘hot money’ inflows.”  That said, last week’s decision by lawmakers to approve a government proposal to gradually limit the sale of subsidized fuel in 2011 will have inflationary effects not only on headline numbers, but also on “core” measures via transport related feed through.  As the WSJ wrote, said reform was much needed as it will boost [the country’s] ability to finance badly needed projects to upgrade its transportation and other infrastructure, which could increase Indonesia’s attractiveness as an investment destination.”  Barclays sees a 50-80bp uptick on a staggered basis, which may even be on the high end when compared with other estimates.  Yet no matter what, somewhat slower growth appears in the cards and most 2011 GDP estimates have been slightly revised accordingly.  Nevertheless FDI flows from China and India especially are robust on the back of manufacturing and resources, and most analysts expect a sovereign upgrade in 2011.  How this translates into the yield spread, which recently hit a three-year low of 402 bp against U.S. treasuries (10-year spread) against the backdrop of the aforementioned inflation issue will be interesting.