ECONOMIC UPDATE - Inflation - New measurement

 

 

End of festivity impact

It is very uncommon for Indonesia to have a relatively low Inflation in the beginning of the year where the last January inflation that under 3% in yearly basis was in 2019 (2.88%) and the other was in 2000 (0.28%). The relatively low inflation shows the impact of long holiday on new year and the Lunar New Year has faded out. Statistics Indonesia (BPS) recorded the increase by 0.39% MoM and 2.68% YoY in January. This came below both our estimation and Bloomberg consensus where we estimated the increase would be at 0.47% MoM (2.89% YoY). However, the comparison of current inflation with the past inflation is not at equivalent level since BPS has used the new basket of goods in 2020 and forth.

 

Introducing new goods and baseline

To keep up with the change, BPS has added 98 new commodities (e.g. gadget accessories, online transportation fare, childcare, etc.) and removed 101 commodities (calculator, mail delivery, youth magazine etc.) to form the new measure of inflation. The commodities were reduced from 859 to 835 commodities where the main group classification of the spending increased from 7 to 11 classifications as can be seen in Exhibit 2. The new measure follows the international standard of Classification of Individual Consumption According to Purpose (COICOP). In addition, the baseline is changed from 2012 to 2018. With the new baseline, BPS finds that in 2018, households’ average consumption was Rp7,272,858. In contrast, by using the former baseline in measuring households’ average consumption in 2018, it will be Rp5,580,037. The difference shows by using the 2018 baseline (and new basket of goods), we will be able to capture the more real condition of households’ spending.

 

New food basket of goods still leads the chart

By using the new classification, food basket is distinguished into two; “Food, Beverage and Tobacco” and “Food and Beverage/Restaurant Provision”. The biggest contributor of inflation is the food, beverage and tobacco (1.62% MoM) where it contributed 0.41 to total monthly inflation in Jan-20. The higher price may not only come from the high demand amid the big days in January but from the severe flood causing the detrimental effect of the crops and the distribution of the foods. Many major commodities experienced inflation such as red chili (0.13), fish (0.04), rice (0.03), etc. Amid the inflation of the food, beverage & tobacco, chicken (-0.03) and egg (-0.01) exhibited deflation in January due to excess of supply. 

 

Deflation on transportation

After the festivity is over, transportation contributed deflation as much as -0.11% or grew by -0.89% MoM. The deflation came from the decrease of the airfare (-0.07%) since the demand of the flight subsided over time. Besides, the reduction of fuel on Jan, 5^th 2020 contributed 0.06% of deflation as can be seen in Exhibit 3.

 

Cushion for inflation in 2020

The current relatively low inflation reflects the effort of government to manage the expected rising inflation in 2020. Through the cancelation of electricity subsidy cut plan and the reduction on fuel prices, the government tries to prevent the significant hike of inflation. Besides, Minister of Health is evaluating the increase of BPJS tariff where this may send the signal of cancelation as well though we believe there is no turning back for this tariff hike as long as the BPJS is still deficit. We still maintain our view that inflation in 2020 will still be higher than 2019 where the inflation will be at 3.3% in the YE 2020.