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ECONOMIC UPDATE - Inflation - Remaining cool



Low-low inflation

Statistics Indonesia (BPS) recorded the inflation at 0.10% MoM (1.38% YoY) or continuing the low inflation from the previous month. Thus, the increasing trend of inflation since Aug-20 has already halted. For the yearly basis, it was also slightly lower than our estimation and Bloomberg consensus. It seemed that Chinese New Year in Feb-21 was unable to create higher aggregate price. However, the price of transportation increased, indicating the higher mobility of people especially during the CNY that happened to be on Friday. The low inflation in Feb-21 may send mixed signal where we can perceive that the demand side was still weak amid the pandemic. On the other hand, the low inflation is preferable as people expect that inflation will go high in 2021 as the economy recovers because the low inflation provides space for the future inflation to go higher than current level. 


Price hike on transportation 

Unlike the months before, the biggest contributor of inflation came from transportation basket where it contributed by 0.04% to total inflation with the price rising by 0.30% MoM (0.41% YoY). Every component in this basket had an increase of price. We see the higher price of transportation was due to the long weekend as the Chinese New Year occurred on Friday in Feb-21. The Enforcement of Restrictions on Public Activities (PPKM) seemed to lose its effectiveness as the mobility of people going to office increased by 2.3% from Jan-21 to Feb-21. 


Global food price hike

Food and Agriculture Organization (FAO) recorded the global food prices rising for an eighth consecutive month in Jan-21 to the highest level since Jul-14. This is benefiting farmers but also putting us in risk of domestic inflation as we still depend on imported staple foods. Wheat is the highest imported staple food, followed by sugar, salt and soybean. In Feb-21, the impact of global food prices has not taken effect yet. Thus, we are expecting the higher prices may be translated in Mar-20 inflation figure especially for the food, beverage and tobacco basket.


Vaccine helps the inflation to grow

In the first phase of inoculation program, Covid-19 vaccination began on Jan 11th 2020 and was followed by the smooth and successful delivery of 700,000 dosages. For the second phase, the government will disburse the free vaccine for elderly and social sector workers. Besides, the government has secured 20 million doses of the Sinopharm and Moderna vaccines for the self-funded vaccination program that may start in Apr-21. The government is pursuing the herd immunity that should be achieved by Mar-22. By having more people vaccinated, we see that the inflation will be higher in a slow path onwards as slow as the demand side recovers. 


BI-7DRRR remains the same

After the rate cut taken in Feb-21 by 25 bps to 3.5%, we see BI will wait until some data improving like the demand for credit and expansion of business. Although the wide room for rate cut remains, we see that BI will hold the rate at the current level. Besides, the Fed held its rate unchanged at 0%-0.25% in Jan-21 and the nearest FOMC Meeting is on Mar 16th-17th 2021 or one day before the BI BoG Meeting on Mar 17th– 18th 2021.