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ECONOMIC UPDATE - Inflation - Soaring up



Highest inflation since Oct-15

Statistics Indonesia (BPS) recorded 0.64% MoM (4.94% YoY) of inflation in Jul-22 or the highest since Oct-15 where it was at 6.25% YoY. The rate was higher than our estimate and consensus at 4.72% and 4.82% YoY. The inflation soared due to the heavy rainfall causing floods last month that drove up the price especially on foods due to shortage of supply. Thus, the inflation on volatile foods at 11.5% YoY (the highest since Jan-14 at 11.9% YoY) was mainly responsible for recent price hike. However, the core inflation is still manageable at 2.86% YoY that may lead Bank Indonesia (BI) to hold the interest rate unchanged this month.


Double digit food price growth

The highest growth and the biggest contributor, 48.4% of total inflation, was food, beverage, and tobacco where it increased by 1.16% MoM (9.35% YoY). The main determinants were red chili contributing 0.15% to total inflation followed by shallot at 0.09%. After being hot topic since past 3 months, the government has shed the light on cooking oil price eventually where it contributed a deflation by 0.07% to total inflation. However, food prices have already achieved a double-digit growth for the first time since pandemic at 10.9% YoY.


Heavy rainfall causes price hike

According to the Ministry of Trade, the supplies of chili peppers and other several crops were disrupted by heavy rainfall and plant diseases in Jun-Jul period. There was also an attack of anthracnose pest, common rainy season, in Tuban, Blitar and Kediri, which are centers of chili production. Both led to changes in cropping schedules and aggregate supply. However, some production centers have started to improve and are predicted to have a big harvest at the end of Jul-22. Thus, we expect the food prices especially the horticulture ones will slightly ease in Aug-22.


Higher energy prices

On July, 10th 2022, Pertamina has again raised the prices of three types of non-subsidized fuel (BBM) products below due to higher global oil price. Pertamina claims that the non-subsidized fuel consumption is 17% of total fuel consumption where only 5% is coming from Pertamax Turbo and Pertamina Dex. As a result, we see the substitution effect may occur from the non-subsidized fuel consumption to the subsidized one. However, as long as the subsidized fuels such as Pertalite and Solar, 83% of total fuel consumption, stay on their current prices, we expect the impact on the administered price will manageable. However, it teamed up with the electricity tariff that was increased as well for the first time in past 5 years. However, the energy sector contributed the least by 10.9% to total inflation. However, the administered price contributed considerably big by 32.8% of total inflation.


BI-7DRRR stays unchanged

Due to the prolonged Russia-Ukraine war, supply disruption, and the moderate monetary policy tightening by BI, last month we just revised up our inflation rate forecast from 4.2% to 4.8% YoY. However, we expect the inflationary pressure will lessen in 4Q22 as the food supplies start to normalize and the monetary policy will take effect there eventually. With the manageable core inflation, we expect BI will hold the rate unchanged on August, 22nd – 23rd 2022.