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ECONOMIC UPDATE - Inflation - Fly with airfare



Deflation occurs

In Oct-21, Statistics Indonesia (BPS) recorded an inflation at 0.12% MoM (1.66% YoY) reversing the deflation from last month. The price level was lower than our estimate at 1.70% YoY but slightly higher than Bloomberg consensus at 1.65% YoY. We thought with the more relaxed mobility restrictions (PPKM) in Oct-21, it could boost the price of foods basket and restaurant provisions basket higher. In fact, it was the transportation basket that jumped high. It contributed the most to the inflation because of the higher price on airfare during the level 1 and 2 PPKM in Java-Bali. If the government does not tighten the PPKM or at least the PPKM regulation remains the same, we see the inflation will get higher in a safe way. Thus, the inflation will bring no threat in near future as it is also below Bank Indonesia (BI) target for a 15th straight month. 


Higher airfare cost

The highest growth and the biggest contributor of inflation was transportation basket where it contributed 0.04% to the inflation where it increased by 0.33% MoM (1.21% YoY). The main determinant of inflation in this basket was airfare at 0.03% followed by fuel at 0.01% of inflation. In Oct-21, the airfare increased by 3.91% MoM because the demand got higher during the more relaxed PPKM. This was expected as the government provided relaxations in flights regulation and opened the international flights to Bali in Oct, 14th 2021.


Administered prices rise

Food, beverage and tobacco basket had a limited price increase as Indonesia experienced the seasonal harvest period during August-October. One of the biggest contributors in inflation was cooking oil at 0.05% to total inflation, thanks to the rise of CPO prices. Not only CPO, the oil price rebounded as well. However, the government is still mulling whether to increase the fuel price or not amid the higher oil price. If the government increases the fuel price, we see administered prices will contribute the most next month to the inflation. The administered prices component recorded the highest growth in inflation at 0.33% MoM (1.47% YoY) up from 0.14% MoM in the preceding month. It was also the biggest contributor as it brought 0.06% to total inflation. In other word, the half of Oct-21 inflation was due to the administered price. The price hike was mainly driven by the increase of airfare since the government regulates the airfare in Indonesia.


Vaccine supports consumer confidence

In the last week of Oct-21, Indonesia's new weekly cases dropped by 23% in a week. It has successfully achieved below a thousand new cases daily. This is a significant improvement as previously Indonesia experienced a peak of around 50,000 new daily cases in mid Jul-21. As of Oct, 31th 2021, more than 193 million vaccines have been administered. Thus, Indonesia has vaccinated about 44% of the population with first dose. The promising result of Covid-19 handling in Indonesia brings brighter prospect to the economy. This was reflected by Consumer Confidence Index (CCI) in Indonesia where it jumped from 77.3 in Aug-21 to 95.5 in Sep-21. Under the recent success on Covid-19 containment, we believe the CCI can achieve more than 100 just like in Apr-Jun 2021.


BI-7DRRR stays unchanged

It seems that inflation will be under BI target at 3±1% YoY as the consumption has not fully recovered from Covid-19 impact. We still maintain our estimate at 1.9% for YE 2021 as the risk of inflation looms from the surge of Producer Price Index (PPI) and Wholesale Price Index (WPI) lately. Besides, there are possibilities of shortage of imported commodities, creating imported inflation. All in all, the price pressure is expected to remain low in 2021. Thus, we see BI will hold the rate at the current level on Nov, 17th – 18th 2021 to boost the inflation and to keep the market stays alluring.