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ECONOMIC UPDATE - Inflation - Benign inflation in a year



Hike on holiday-related prices 

Inflation in Dec-19 has made a new significant record as it was the lowest inflation since year 2000 in yearly basis. Besides, it is quite rare to have inflation below 3% YoY in Indonesia for decades. Statistics Office (BPS) recorded an increase by 0.34% MoM and 2.72% YoY in December. This came way below both our estimation and Bloomberg consensus where we estimated the increase would be at 0.60% MoM (2.99% YoY). The core inflation was almost unchanged from Nov-19 position at 0.11% MoM (3.11% YoY). The wide gap between the CPI and the core inflation on the monthly basis shows the volatile components such as foods and long holiday-related consumptions such as transportation that played significant effect due to the festive season that has just passed. 


Festive season impact on inflation

Almost all of the components brought the surge in price except the component from education, recreation and sport basket that posted decrease on its price of -0.05% YoY. The dominant contributors for inflation from the food basket were egg of 0.08%, shallot of 0.07% and fish of 0.02%. From the processed food itself, cigarette contributed about 0.03% of the inflation. Even though the increase on cigarette excise has only just begun this month, the early hike on cigarette price just aimed to smooth the price change so consumers may easily adjust their consumption on cigarette this year. From the clothing basket, it contributed none towards inflation due to gold and jewelries were in the basket that happened to face 0.01% of deflation along the way. Nevertheless, the other subgroup of clothing recorded higher prices due to higher demand on new clothing in the middle of feast and new year moment.


High demand on transportation

Transportation is widely expected to have a significant contribution towards the inflation among the long holiday weeks. The transportation, communication and financial service are grouped in one basket and contributed 0.10% to total inflation where the price soared by 0.58% MoM (0.17% YoY) or the highest growth right after the price growth on food basket. The impact of the holiday was undeniable as the biggest surge in this basket price came from airfare, rail fare and intercity transportation that posted 0.07%, 0.02% and 0.01% of contribution to inflation respectively. On the other hand, the other components in this basket, communication and delivery price experienced 0.03% of deflation. For the financial services, this subgroup had no price change. If we compare the contribution of the inflation from the transportation subgroup over the same period from last year, we see a weaker inflation on airfare and rail fare where both of them contributed 0.19% and 0.03% to total inflation in Dec-18. This could be a sign that people start to shift their preference of transportation modes especially the short haul and the better highways and expansion of roads may explain this.


Wrap up inflation in 2019

The aggregate prices were relatively well-managed amid the festive season as the prices were stable in YE 2019. In general, inflation tends to be weaker compared to 2018. The way to distinguish it is to see the contribution and growth of the core, administered and volatile inflation in yearly basis. In 2018, the core and volatile inflation had a similar level with 2019 core inflation as in Exhibit 2 below. The one that can be distinguished easily is the difference between the administered prices in both years. In 2019, the government made little change on administered price then it brought the overall inflation to be in the range of Bank Indonesia (BI) target at 3.5±1%. As a result, the inflation and core inflation for YE 2019 were under our revised estimation in Exhibit 1. For 2020, our estimation of inflation is still under our review in order to adjust the lower actual inflation and to incorporate the effect of the cancelation of electricity subsidy cut plan.