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ECONOMIC UPDATE - Inflation cools to lowest level since August

Lower-than-expected inflation in January

Statistics Indonesia (BPS) recorded a 0.34% MoM (5.28% YoY) of inflation in January, the lowest level since August last year of 4.69%. This came slightly lower than our estimate at 5.33% YoY and consensus at 5.40% YoY, however, it was above the upper limit of the central bank's 2-4% target for the eighth straight month. As also expected, the inflation rate is lower than the previous month where Christmas and Holiday season drove the December 2022 inflation rate to 5.51% YoY. 


Monthly inflation mainly propped up by higher prices of food

On a monthly basis, the highest growth and the biggest contributor of January’s inflation rate was food, beverage, and tobacco basket where it contributed 0.30% to the inflation and rose by 1.16% MoM (5.82% YoY). The main determinant of inflation in this basket was cayenne at 17.85% MoM followed by red chili at 10.9% MoM and rice at 2.34% MoM. We believe government (through central and regional inflation control team) will pay attention to stock management and the food distribution chain to ensure that volatile food inflation remains in check for some time.


Gasoline and financial services bring deflation

Transportation basket contributed to deflation by -1.5% MoM thanks to  the price cut of unsubsidized gasoline prices by Pertamina such as Pertamax from Rp13,900 to Rp12,800/liter and Pertamina Dex from Rp18,800 to Rp16,750 per liter on 3 January . This we believe was in line with the downtrend in global oil prices. The transportation basket was the only basket that brought deflation on monthly basis. On yearly basis, the basket of information, communication, and financial services recorded deflation by -0.22% YoY, further declining from -0.36% YoY in December. 


Preparing for the fasting month

Indonesia will begin holy fasting month of Ramadan in next month. Based on the historical data, the inflationary pressures historically rise one month before fasting. We predict that February’s inflation rate will increase by 0.28% MoM and 5.61% YoY. Meanwhile, we maintain our   inflation rate forecast of 3.96% YoY for this year, which will be helped by high-base effect from last year’s increase in subsidized fuel prices as well as lower trend in imported commodity prices. This is in line with Bank Indonesia’s target inflation of 3.0±1%.


BI-7DRR impact

Bank Indonesia (BI) raised the benchmark rate (BI-7DRR) by 25 bps to 5.75% in January 2023. BI believes a rate hike in January is adequate to meet 2023 inflation target of 3.0±1%, in line with our estimation at 3.96% YoY. We acknowledge the apparent shift in tone to dovish from BI and expect no interest rate hike in 1Q23. However, we retain our view for another 25 bps hike to 6.0% between 2Q23-3Q23 as a buffer against volatility in the financial markets and to support rupiah.