ECONOMIC UPDATE - Inflation - Spectre of deflation remains



Two successive months of deflation

Statistics Indonesia (BPS) recorded deflation at 0.05% MoM although in yearly basis the inflation still occured at 1.32% YoY in Aug-20. Compared to the previous deflation in Jul-20, the Aug-20 deflation was smaller and this may send signal that monthly inflation may occur on 4Q20. The inflation rate was also lower than both our and Bloomberg consensus that expected 0.04% MoM and 0.01% MoM, respectively. Weak household expenditure still drove the deflation especially on the basic food basket prices. However, the improvement of the economic activity and the realization of fiscal stimulus may bring the inflation back ahead.


Low demand on food stuffs

The biggest contributor of deflation came from food, beverage and tobacco basket where they contributed by 0.22% to total deflation where the price slipped by 0.86% MoM (though it still showed at 1.31% YoY). On deflation components, chicken, shallot and tomato contributed the most as it brought by 0.09%, 0.07% and 0.02% to total deflation. We still see the seasonal factor brought the shallot price cheaper as in Jul-20 to the beginning of Aug-20 as it was the time of shallot harvest. The second highest inflation contributor came from transportation basket where it contributed by 0.02% to total deflation where the price slipped at 0.14% MoM (1.14% YoY). Compared to Jul-20, the deflation of transportation basket got smaller in where it was 0.17% MoM (0.71% YoY) previously. We can expect transportation price will get higher ahead as the regional large scale social restriction (PSBB) loses its effectiveness to halt people mobility.


Gold price still soars

The biggest contributor of inflation was personal care and other services where it contributed by 0.13% to total inflation as it grew by 2.02% MoM (6.20% YoY). The significant contributor of inflation in this basket of good is gold jewelry. The pandemic makes people shift to safe haven like gold as it is known to be more safer. 


Low realization of stimulus 

Stimulus may help the economy to bring the inflation back. However, on the last week in Aug-20, budget realization of the National Economic Recovery (PEN) program has stood at Rp182.5 tn (USD12.4 bn) or 26.2% from the allocated ceiling of Rp695 tn (USD47.4 bn). Related to the demand side stimulus, social protection stimulus realization reached Rp93.2 tn (or just 49.7% of total Rp203.9 tn). If the government successfully boosts the realization of the stimulus, we see a stronger households’ purchasing power in upcoming months and it may support the inflation a bit.


Temporary deflation

We still maintain our view that the deflation will be tame as the economy starts to grow once more right after the PSBB eased. However, we revised down our estimation on inflation that will be at 2.3% YoY in YE 2020 as the deflation occurred until Aug-20. The low inflation and the appreciating rupiah would provide room for BI to trim policy rates further but we still expect BI is unlikely to cut BI-7DRRR as the domestic economic recovery especially on household’s purchasing power continues at slow pace. Besides, loan growth seems getting better where it grew by1.53% YoY in Jul-20. In terms of loan category, investment loan remained the fastest by growing at 5.92% YoY, working capital loan grew by -0.8% YoY, while consumer loan grew by 1.45% YoY. Thus, we see BI will hold its rate at 4.0% in its next BoG Meeting.