ECONOMIC UPDATE - Inflation - Start low, go slow

 

 

Good start for 2021

In medical terminology, lowest dose is given to the patient as the dose may increase slowly as needed for the sake of comfort goal. In other terms: start low, go slow. The low inflation in Jan-21 is preferable as people expect that inflation will go high in 2021 after the economy recovers. The low inflation provides space for the future inflation to go higher than current level. The inflation at 0.26% MoM (1.55% YoY) broke the trend of the increasing inflation since Aug-20. It was also lower than our estimation and Bloomberg consensus as stated on the left table. As the festive month done in Dec-20, household consumptions especially for transportation start to diminish due to the public activity restriction enforcement (PPKM) introduced in Jan-21.

 

Manageable food price rise

The biggest contributor of inflation came from food, beverage and tobacco basket where they contributed by 0.21% to total inflation with the price rising by 0.81% MoM (2.81% YoY). Cayenne chili, fish and tempeh contributed the most by 0.08%, 0.04% and 0.03% respectively to total inflation from this basket. On the other hand, there were some components experiencing lower price such as egg that brought 0.04% of deflation due to the excessive supply. The cheaper egg may persist until Feb-21 where the monthly stock of egg is surplus at 38,136 tons currently. 

 

Lower demand for transportation

Due to the PPKM imposed in the beginning of Jan-21 in Java-Bali, mobility was limited. Thus, transportation basket price decreased by 0.30% MoM (-0.26% YoY) and contributed 0.04% of deflation, the only one deflation among the 11 basket of goods. The biggest deflation contributor in this basket came from air transportation at 0.06%. On the other hand, toll road tariff was the highest contributor of inflation at 0.02%. PT Jasa Marga (JSMR) implemented toll tariff adjustments on several routes such as Palimanan-Kanci (Palikanci) Toll Road, Semarang Sections A, B, C and Surabaya-Gempol (Surgem). This Trans Java toll tariff adjustment is aimed to ensure a conducive toll road investment climate, maintain the confidence of investors and ensure the level of service of toll road.

 

Inflation goes higher slowly

Covid-19 vaccination began on Jan, 11^th 2020 and was followed by the successful delivery of 700,000 dosages of vaccines across the country for the first phase of the inoculation program. The first phase is expected to last until March or Apr-21. Further, the government aims to cover 67% of the 18-59 age group of the country’s population or around 107 people under its free Covid-19 vaccination program. This means the government needs 246 million dosages in total. The vaccination progress brings hope for economic recovery. However, it provides a long recovery path as the mass vaccination will take a significant amount of time. Thus, we see that inflation will be higher in a slow path onwards as slow as the demand side recovery. Just like the dose given from a medication, the inflation starts low and goes higher slowly.

 

BI-7DRRR remains the same

Although the wide room for rate cut remains, we see that BI will wait until the demand for credit starts to increase substantially. Besides, the Fed has just hold Fed rate unchanged at 0%-0.25% in Jan-21. In result, we believe BI will hold its rate at 3.75% in Feb 17^th – 18^th BoG Meeting.