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ECONOMIC UPDATE - Inflation - The end of disinflation



End of three months deflation

After we experienced the end of three months monthly deflation, now we can say the disinflation had to end as well. Disinflation itself is when price inflation slows down temporarily.  As household consumption grows approaching the festive month during the current soft economic recovery process, the price goes up. Monthly inflation occurred at 0.28% MoM (1.59% YoY) in Nov-20. The inflation rate was higher than our and Bloomberg consensus that expected 1.52% YoY and 1.54% YoY, respectively. However, the improvement of the economic activity and the realization of fiscal stimulus may bring the inflation higher back ahead, but still under Bank Indonesia’s (BI) target at 3±1% as we predict in Dec-20 the inflation will rise to 1.72% YoY.


Higher food prices

The biggest contributor of inflation came from food, beverage and tobacco basket where they contributed by 0.22% to total inflation where the price rose by 0.86% MoM (2.87% YoY). Chicken, egg and red chili contributed the most at 0.08%, 0.04% and 0.04% respectively to total inflation from this basket. On the other hand, there were some components experiencing lower price such as rice and meat as each of them brought 0.01% to total deflation. We see the chicken culling program effect in Nov-20 is kicking in and will be more obvious Dec-20 as it will improve the supply side issues in poultry.


Transportation basket makes a coming back

Due to the looser regional large-scale social restriction (PSBB), transportation basket price increased by 0.30% MoM (-0.47% YoY) and contributed the second highest inflation at 0.04%. Interestingly, all of subsectors in transportation basket showed higher price ranging from air, land to sea transportation. The price in Dec-20 will be higher as well as we expect PSBB loses its effectiveness to halt people mobility especially in the peak season like Christmas and New Year celebration.


Low realization of stimulus 

Stimulus may help the economy to bring the inflation back. However, in the end of Nov-20, budget realization of the National Economic Recovery (PEN) program has stood at Rp431.5tn (USD30.5 bn) or 62.1% from the allocated ceiling of Rp695.2 tn (USD47.4 bn). Related to the demand side stimulus, social protection stimulus realization has reached Rp207.8 tn (88.9% of total Rp234.3 tn). If the government successfully boosts the realization of the stimulus, we will see a stronger households’ purchasing power in Dec-20 and it may support the inflation a bit. On bright side, we are witnessing the dynamic adjustment in PEN reclusterization or the reallocation of stimulus from the low realization to the higher one. However, we see that it will be strenuous to achieve the 100% realization in YE 2020 due to the limited time.


Economic recovery to help to limit disinflation

As predicted, previously we see that the deflation is tame as the economy starts to grow once more right after the PSBB eased in 4Q20. Thus, we see the inflation will be at 1.72% YoY in YE 2020 with possibility of it will be lower. The low inflation and the appreciating rupiah would provide room for BI to trim policy rates further but we still expect BI is unlikely to cut BI-7DRRR to keep the monetary ammunition available for the future use. Thus, we see BI will hold its rate at 3.75% in its next BoG Meeting.