ECONOMIC UPDATE - Inflation - Minimum impact of COVID-19 yet

 

 

Consistently low

Monthly inflation in February is always lesser than January inflation in last 10 years. It is common since in January, some big days ride up major prices and provide high base for February. Statistics Indonesia (BPS) recorded the increase by 0.28% MoM and 2.98% YoY in Feb-20. This came higher both our monthly estimation and Bloomberg consensus where it was estimated at 0.10% MoM and 0.16% MoM. The relatively low inflation was supported by the deflation on administered price or the energy component inflation due to the price cut on some type of fuels.

 

Normal inflation on foods

As predicted, the biggest contributor of inflation is food, beverage and tobacco (0.95% MoM) where it made up 0.25% on monthly inflation (89% to total monthly inflation). Commodities that contributed the most were garlic by 0.09%, red chili by 0.06% and chicken by 0.02%. The higher price of garlic came from the heavy rainfall in 1Q20 on some regions and specifically due to the disruption of import restriction from China due to COVID-19. However, the import restriction should be normalized in Mar-20 as the imported garlic was only being held in the customs area and prepared to be distributed later. The import restriction is based on Ministry of Trade Regulation No. 10/2020 that stipulates a temporary import ban on at least 53 animals, ranging from reptiles and mammals to poultry, which has been in force since February, 7^th 2020. Thus, the other goods shipped from China, including garlic would continue as usual. Amid the inflation of the food, beverage & tobacco, yardlong bean exhibited 0.01% of deflation in Feb-20.

 

Deflation on transportation

The price of transportation gets to decline as the high season is over. Deflation on transportation was 0.37% MoM or contributed by -0.04% to total monthly inflation. Besides the lower demand of transportation, the cut of some fuel prices based on Ministry of Energy and Mineral Resources Regulation No. 187 K/10/MEM/2019 contributed 0.03% of deflation. Airfare contributed 0.03% to deflation as well. The deflation on this basket is predicted to remain on next months due to COVID-19 outbreak as the government is offering 50% off flight tickets to allure domestic and international tourists to come to the top 10 major destinations in Indonesia.

 

Benign COVID-19 impact on inflation, so far

The sore impact of COVID-19 outbreak on inflation may come in next 2 months since March and April tend to be relatively low, if other things held constant. In average, March (0.10% MoM) and April (0.05% MoM) display lower inflation compared to February (0.14% MoM) and May (0.26% MoM) in last 10 years. Despite any government’s effort to control the aggregate price, most likely we will lever up our inflation estimation for YE 2020 from 3.3% YoY to be likely at higher range at 3.4-3.5% YoY due to the outbreak impact. The expected higher inflation and the significant depreciating rupiah in the same time should lead BI to leave the rate unchanged in next BoG Meeting. However, the room to have another rate cut is still open especially if the Fed decides to have a rate cut this month. Amid the outbreak, we predict the Fed will have a rate cut in its next FOMC. In consequence, it will lead BI to have another rate cut by 25 bps in Mar, 19^th 2020.