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ECONOMIC UPDATE - Inflation - Food prices remain elevated



The monthly inflation rate slowed down as expected

Statistics Indonesia (BPS) recorded a 5.47% YoY of inflation in February, higher than the previous month at 5.28% YoY. This came slightly higher than our estimate at 5.37% YoY and consensus at 5.42% YoY. Besides, the monthly inflation rate decelerated from 0.34% MoM in January to 0.16% MoM, above our estimate of 0.12% MoM and consensus of 0.13% MoM. Although February is harvest season, the highest growth and the biggest contributor of February’s inflation rate was the food, beverage, and tobacco basket that contributed 0.13% MoM to the inflation and rose by 0.48% MoM.


Yearly inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups increased in February, namely: food, beverages, and tobacco group of 7.23% YoY; clothing and footwear group of 1.18 % YoY; housing, water, electricity, and household fuel group of 3.43% YoY; furnishings, household equipment, and routine household maintenance group of 4.02% YoY; health group of 2.94% YoY; transport group of 13.59 % YoY; food and beverage serving services/restaurant group of 4.08% YoY; and personal care and other services group of 5.63% YoY. On the other hand, information, communication, and financial services group recorded a deflation of -0.20%. However, core inflation decelerated to 3.1% YoY in February from 3.3% in January as all sectors outside food inflation recorded slower inflation.


Avtur price brings deflation

On a monthly basis, the transportation basket, and the information, communication, and financial services basket reported deflation. The transportation basket contributed to deflation by -0.03% MoM, and this price fell by -0.22% MoM. The transportation deflation was helped by a decrease in avtur (jet fuel) price at -1.07% MoM. Furthermore, the basket of information, communication, and financial services recorded deflation by -0.02% MoM. However, this basket did not significantly contribute to the total monthly deflation.


Anticipate the higher inflation this month

Indonesia will begin the holy fasting month of Ramadan this month. Based on the historical data, the inflationary pressures historically rise in this month. Cooking oil and broiler chicken meat became the highest contributor of inflation in Ramadhan last year (April 2021), with contribution to inflation by 0.19% MoM and 0.09% MoM, respectively. Meanwhile, we are still optimistic government (through the 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


BI maintains the BI7DRRR rate unchanged

Bank Indonesia (BI) kept the benchmark rate (BI 7DRRR) stable at 5.75% in Feb-23, in line with our expectation and consensus. The deposit and lending facility rates remained at 5.0% and 6.5%, respectively. BI argues this rate is sufficient to meet its inflation target. We acknowledge the inflation has reached its peak and consistently declining towards 4%, signaling 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. Furthermore, we maintain our inflation rate forecast of 3.96% YoY this year, in line with Bank Indonesia’s target inflation.