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ECONOMIC UPDATE - Inflation - In no hurry



Convenient room for inflation

Inflation is becoming a hot topic worldwide but in Indonesia, it is not the case as it remains cold. In Dec-21, Statistics Indonesia (BPS) recorded the highest inflation on monthly and yearly basis at 0.57% MoM (1.87% YoY). This is the highest level since Jun-20 at 1.96% YoY. The price level was about the same with our estimate at 1.88% YoY but higher than Bloomberg consensus at 1.81% YoY. As expected, the inflation will be below the Bank Indonesia’s (BI) target at a range of 3±1% YoY in 2021. We have been experiencing a consistent 3% of inflation for about 3 years from Apr-16 to Nov-19. Assuming it is a convenient rate of inflation for Indonesia, the low inflation in 2021 provides a room for Indonesia to go back to 3% this year in no hurry.


Foods still on top of chart

The highest growth and the biggest contributor of inflation was food, beverage and tobacco basket where it contributed 0.41% to the inflation and rose by 1.61% MoM (3.09% YoY). The main determinant of inflation in this basket was cayenne at 0.11% followed by cooking oil at 0.08% to inflation. This is natural as the Indonesian National Police found no any hoarding of food during the peak season. The price hike of cayenne itself was mainly due to crop failure due to high rainfall and the eruption of Mount Semeru as well as the end of the harvest period in several production centers.


High inflation abroad

The resurgent of serious inflation happens around the world but not in Indonesia and several big emerging countries. Unlike US, Indonesia's participation in the global value chain has mostly declined in the last ten years. Based on OECD (2020), Indonesia's participation index in 2005 was 43.0 then lowered to 37.1 in 2015. Compared to ASEAN region, the index was 45.9 and developing countries was 41.4. It shows that Indonesia is less integrated to the world relatively. Thus, constraints and price hike on global supply less likely to escalate the price here, especially in things like energy prices, not to mention Indonesia is one of the major energy-exporter.


Higher consumer confidence

In the last week of Dec-21, Indonesia's new Covid-19 cases were around 180 cases on average daily basis. This is a significant improvement as the number still goes lower day by day. Besides, more than 280 mn doses of the vaccines have been administered. Thus, Indonesia has vaccinated about 51.7% of the population with second 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 113.4 in Oct-21 to 118.5 in Nov-21. Under the recent success on Covid-19 containment, we believe the CCI can sustain its level above 100 in 2022. Because a rise in confidence is associated with higher consumption, it leads inflation to soar. 


BI-7DRRR stays unchanged

President Jokowi has officially extended the status of the Covid-19 pandemic in the country. Thus, we expect the recovery of household consumption will go slow unlike the other component of GDP. Under the condition, we still maintain our estimate at 3.2% for YE 2022. We are still reviewing the risk of higher inflation coming from the surge of Producer Price Index (PPI) and Wholesale Price Index (WPI). We remain optimistic that the inflation in 2022 will stay manageable. Thus, we see BI will hold the rate at the current level on Jan, 19th – 20th 2021 to stay accommodative and to keep the market stays alluring.