Harvest and cheaper non-subsidized fuel drive monthly deflation
According to Statistics Indonesia (BPS), the monthly inflation rate decreased by -0.12% MoM in Sep-24, marking the fifth consecutive month of deflation. This deflation rate was steeper than both our expectations and the consensus forecasts of -0.04% MoM and -0.02% MoM, respectively. The decline was primarily driven by the harvest season, leading to a -0.59% MoM deflation in the food, beverages, and tobacco category, which contributed -0.17% to the headline inflation rate. Additionally, transportation basket prices also fell by -0.16% MoM, contributing -0.02% to the overall inflation rate, primarily due to lower non-subsidized fuel prices. Furthermore, volatile food prices continued their deflationary trend for the sixth straight month, dropping by -1.34% MoM in September. Administered prices also recorded a deflation rate of -0.04% MoM, the lowest level since May. Meanwhile, core inflation slowed to 0.16% MoM in September, down from 0.20% MoM in August. Looking ahead, we expect the deflationary trend to reverse in October, driven by a projected decline in agricultural productivity. According to BPS, domestic rice production is expected to fall from 2.87 mn tons in September to 2.59 mn tons in October. Additionally, the 25 bps rate cut by Bank Indonesia (BI) in September, from 6.25% to 6.00%, along with the regional election campaign in October, is likely to boost consumption. On the other hand, we anticipate that the Minister of Energy and Mineral Resources will delay the fuel subsidy restrictions this month, as the regulations have not yet been finalized. Moreover, Pertamina has reduced the price of non-subsidized fuel for October, driven by a decrease in crude oil prices. WTI crude oil fell by -7.33% MoM to USD 68.2/bbl in September.
Yearly inflation eases as expected
The annual inflation rate eased to 1.84% YoY in Sep-24, continuing its downward trend since March and reaching the lowest level since Nov-21. This figure is closely aligned with our estimate of 1.89% YoY, and below the consensus forecast of 2.00% YoY. Notably, the food, beverages, and tobacco basket was the largest contributor to inflation at 0.73% YoY, with price growth in this category slowed to 2.57% YoY in September, down from 3.39% YoY in the previous month. Volatile food inflation also decreased, falling to 1.43% YoY in September from 3.04% YoY in August, driven by a drop in foodstuff prices to 1.53% YoY from 2.76% YoY in previous month. Additionally, administered prices decelerated to 1.40% YoY in September from 1.68% YoY in August. On the other hand, core inflation slightly increased to 2.09% YoY, up from 2.02% YoY in the previous month, closely aligning with both our estimate and the consensus forecast of 2.05% YoY and 2.03% YoY, respectively. Although annual inflation continues to decline, we expect this rate to potentially rise for the remainder of the year. This increase could be influenced by factors such as local elections, the BI rate cut, and Christmas festivities. However, rupiah appreciation may help lower imported inflation. Considering these factors and five consecutive month of deflation, we have revised our inflation forecast down from 2.8% YoY to 2.2% YoY in YE24.
BI's surprise rate cut and its impact on inflation and the Rupiah
BI unexpectedly reduced its benchmark rate by 25 bps to 6.00% in September, below the market expectation of 6.25%. While this rate cut could potentially lead to higher inflation due to increased consumption, it is not a major concern given the monthly deflation trend over the past five consecutive months. Inflation in September was recorded at 1.84% YoY, which remains comfortably within BI’s target range of 1.5% to 3.5%. Furthermore, Rupiah remains strong, appreciating by 1.67% YtD and 2.08% MoM to Rp15,140/USD, supported by a weaker US dollar.
The dollar index (DXY) declined by 0.55% YtD and 0.90% MoM to 100.77, driven by expectations of a Federal Reserve rate cut. In September, the Federal Reserve reduced the Federal Funds Rate (FFR) by 50 bps to a range of 4.75%-5.00%. Looking ahead, we expect the Fed to cut rates by 25 bps in both November and December to overcome potential economic slowdown and high unemployment, bringing the FFR to 4.25%-4.50% in YE24. Furthermore, this dovish stance is expected to ease pressure on the Rupiah. As a result, we have revised our average Rupiah forecast from Rp15,900/USD to Rp15,750/USD for 2024. A stronger Rupiah is expected to help reduce imported inflation.
