ECONOMIC UPDATE - Inflation - Food-led inflation



Food contributes the most

Statistics office (BPS) recorded a slight increase in inflation by 0.14% MoM (3.00% YoY) in November. This came below both our estimates and Bloomberg consensus where we estimated higher inflation on 0.19% (3.08% YoY). Meanwhile, the lower core inflation remained stable at 0.11% MoM (3.08% YoY). The core inflation came lower compared to the headline inflation as the inflation in Nov-19 was built from the food baskets that were more likely related to temporary factors that may reverse themselves later. In other words, the inflation comprised of the volatile components as in Nov-19 there was no significant change on other inflation components. 


Different impact from seasonal irregularity

Seasonal irregularity is responsible for the price anomaly on some crops. The highest contributor of inflation was food as it contributed 0.07% and it grew at 0.37% MoM followed by the processed food by 0.04% with its growth at 0.25% MoM to total inflation with the least contributor was transportation, communication and financial services group as it contributed -0.01% to total inflation or posted a deflation of 0.07% MoM. Except the food and processed food, the change in other components price level was relatively light. From the food basket, although in Oct-19 shallot price showed the lowest growth by 0.94% (See our last month Inflation Update: frail inflation coming back), it came back with the highest growth as stated in Exhibit 2. In line, garlic had the same direction. For red chili, the reversed direction happened in Oct-19 and Nov-19 as well. We see this phenomenon as natural since the stock of shallot (and garlic) got shrinking in Nov-19 as the harvest season of shallot should be on midyear until August, but due to seasonal irregularity, it shifted to around September. Thus, we had a deflation of shallot in Sep-19 then it crept upward slowly in Oct-19 until Nov-19. However, the impact of seasonal irregularity hit differently among different crops. One thing is sure, it created severe drought and make a lagged harvest season to all crops. We predict the increase in Dec-19 of food baskets will be raised more by demand-led inflation instead of the shortage of food supply without ruling out the shortage will hit some consumers’ purchasing power.


Cigarette starts to climb up

Due to the higher excise on cigarette starting in Jan-20, the price on cigarette started to increase last month. From cigarette and alcoholic drinks basket, it increased by 0.43% MoM. In general, the processed food, beverage, cigarette and tobacco basket turned out to have higher price, as follow: processed food (0.47% MoM), non-alcoholic drinks (0.38% MoM) and cigarette and alcoholic drinks (0.43% MoM).  The slow but sure hike on cigarette price just aimed to smooth it out so the consumers may easily adjust their consumption on cigarette next year. 


Certain higher inflation in Dec-19

The benign inflation will remain until YE 2019. However, the inflation in the end of every year is certain due to the peak season where the majority tend to consume more. Higher demand will leverage the price up including the price on food and transportation significantly. The end of El Nino may leave the effect until the near future so the shortage of some foods supply will increase current benign inflation level. On the other hand, the rest of the months in 2019 are the peak season, meaning the consumption will increase. There is no need to worry since the higher aggregate price is still favorable as it nourishes the economy. Especially, Bank Indonesia (BI) still maintains its target of inflation at 3.5±1%. As in Nov-19, the inflation was at 2.37% YtD, we see the inflation in 2019 is less likely to achieve 3%. If there is no major change in the economy, we estimate the inflation in Dec-19 will be at 0.50% MoM. The higher price level is certain but it is still favorable.