ECONOMIC UPDATE - Inflation - Lowest inflation since 2000, below BI’s target

 

 

Lowest inflation in 20 years

Statistics Indonesia (BPS) recorded low inflation at 0.18% MoM (1.96% YoY) in Jun-20. The inflation edged down to the lowest in 20 years due to the low demand amid the Covid-19 pandemic. This inflation is the lowest inflation in 20 years where in June 2000, it was 2.04% YoY then it doubled in the next month then grew faster afterward. It is very unusual for Bank Indonesia’s inflation target miss the target at 3±1%. No sweat, the target itself is intended for whole year 2020. The inflation rate was also lower than both our and Bloomberg consensus that expected 0.11% MoM and 0.05% MoM, respectively. Followed by the muted Ramadan effect on the previous month, this thin higher inflation after Ramadan month drew different pattern compared to previous years. The pandemic and large-scale social restrictions (PSBB) have changed the pattern of the monthly inflation in Jun-20 as the peak of inflation used to take place during the Ramadan month in May-20. 

 

Chicken price flies away

The biggest contributor of inflation came from food, beverage and tobacco basket where they contributed 0.12% to total inflation with 0.47% MoM (3.03% YoY). On inflation components, chicken contributed the most as it brought 0.14% to total inflation where in some cities the price went up to around 50%. According Ministry of Trade, chicken price went high due to reduced supply in June after the peak chicken consumption in Ramadan month. The second highest inflation contributor came from transportation basket where it contributed 0.05% to total inflation with 0.41% but on the yearly basis it contracted by 0.95% YoY. All of the component in this basket displayed a higher price where the inflation from airplane were the biggest at 0.02%. It happened due to the relaxation of PSBB as it restored people’s mobility under tight health protocols, still.

 

Small deflation arises

From all of the baskets, only housing, water, electricity and fuel basket that brought deflation as it contributed deflation by -0.01% but on yearly basis it still grew by 1.12% YoY. The deflation happened due to lower price of 12 kg gas cylinder in some cities. Some spices contributed to total deflation as well such as garlic and shallot which contributed 0.04% and 0.03% to total deflation, respectively. Besides, chili, onion, cayenne chili, cooking oil and sugar contributed by 0.01% each to total deflation. The deflation in food basket happened due to the low demand towards those commodities.

 

Avoiding deflation at all cost

As in Jul-20 we are expecting the end of PSBB transition to the so-called New Normal, we see demand will recover in the upcoming months so the threat of deflation will be tame. Even though in May-20 PSBB was still implemented, foreign tourists arrival slightly increased by 3.1% MoM (-86.9% YoY) to 163,600 tourists. This may be a hint of a rebound in private consumption and the looming hope for domestic tourism to grow. We see risk of major foods supply chain and the higher price of imported foods may bring impact on the inflation in upcoming months. However, the government has ensured that food supplies remain secure. For the sake of economic recovery, deflation will make the recovery from the coronavirus pandemic harder. Thus, the govermment has to make sure that inflation still there or even better at BI’s target. Thus, we still maintain our estimation on inflation that will be at 3.1% YoY during the pandemic in YE 2020. The manageable inflation and the appreciating rupiah would provide BI room to have a rate cut in this month on July, 16^th 2020. Thus, we expect BI to have another a rate cut by 25bps from 4.25% to 4.0% as the shock on demand side is getting softer.