First deflation in 2020
Statistics Indonesia (BPS) recorded deflation at 0.10% MoM although in yearly basis the inflation still came at 1.54% YoY in Jul-20. The last deflation showed up in Feb-19 at 0.08% MoM. Feb-19 deflation is not similar to Jul-20 deflation as in the beginning of 2019 some events such as food price normalization, fuel price and airlines ticket fare declines happened after festive months. Besides the already low inflation in last month, Jul-20 inflation is the lowest inflation in 20 years where in June 2000, it was 2.04% YoY then it doubled in the next month then accelerated faster afterward. The inflation rate was also lower than both our and Bloomberg consensus that expected 0.04% MoM and 0.05% MoM, respectively. The low era of inflation is associated with current unusual situation where households tend to save more in order to avoid uncertainty in the near future due to the pandemic.
Drop in food stuffs prices
The biggest contributor of deflation came from food, beverage and tobacco basket where they contributed by 0.19% to total deflation with price dropping at 0.73% MoM (though it still showed at 1.73% YoY). On deflation components, shallot contributed the most as it brought by 0.11% to total deflation. Seasonal factor brings the cheaper shallot price as in Jul-20 and perhaps until the beginning of Aug-20 is the time of shallot harvest. The second highest inflation contributor came from transportation basket where it contributed by 0.02% to total deflation with deflation at 0.17% MoM (0.71% YoY). All of the component in this basket displayed a higher price where the inflation from airplane were the biggest at 0.02%.
Hike on gold price
One of the inflation contributor was personal care and other services where it contributed by 0.06% to total inflation as it grew at 0.93% MoM (6.05% YoY). The significant contributor of inflation in this basket of good is gold jewelry. The pandemic makes people shift to safe haven like gold as it is known to be more safer. In Jul-20, gold price rose high at 10.3% MoM due to the hike of global gold price.
Relatively low realization of stimulus
The pandemic drags people’s purchasing power and it leads to the low inflation. Thus, the government has allocated Rp203.9 tn stimulus for the demand side where it contains Family Hope Program (PKH) social benefit that will be given for 10 mn families, food transfer for 20 mn families until the Unconditional Cash Transfer. However, until the end of Jul-20, the realization of the stimulus has just reached 38% of total demand side stimulus. If the government successfully boosts the realization of the stimulus we see a stronger households’ purchasing power in upcoming months and it may support the inflation a bit.
We still maintain our view that the deflation will be tame as the economy starts to grow once more right after the large-scale social restrictions (PSBB) eased. We keep an eye on the growth of broad money (M2) as well where it slowed down in Jun-20, from 10.4% recorded in May-20 to 8.2%. We expect it will rise eventually due to BI’s liquidity injection to the economy. It will be much harder to save the economy under deflation. Thus, the govermment has to make sure that inflation still there. All in all, we still maintain our estimation on inflation that will be at 3.1% YoY during the pandemic in YE 2020. The low inflation and the appreciating rupiah would provide room for BI to trim policy rates further but we still expect BI will hold the BI-7DRRR at 4.0% with wait-and-see approach to other countries’ policy rate under current situation.