Slight rise as expected
Inflation at 0.45% MoM (1.68% YoY) remarks the final inflation in 2020. The inflation accelerated for a fourth straight month from Sep-20. The regional large-scale social restriction (PSBB) cannot resist the effect of festive month in Dec-20 leading the rising of prices. Travel restrictions also partially failed to halt mobility as reflected in the higher price of transportation. The inflation rate was lower than our estimation but higher than Bloomberg consensus as stated on the left table. As expected, the inflation failed to achieve Bank Indonesia’s (BI) target at 3±1% in YE 2020.
Manageable food price rise
The biggest contributor of inflation came from food, beverage and tobacco basket where they contributed by 0.45% to total inflation with the price rising by 1.49% MoM (3.63% YoY). Red chili, egg and cayenne chili contributed the most by 0.12%, 0.06% and 0.05% respectively to total inflation from this basket. On the other hand, there were some components experiencing lower price such as shallot that brought 0.01% of deflation. We see the chicken culling program effect in Nov-20 is kicking in and will be more obvious in 2021 as the price of chicken has already increased by 0.01% MoM in Dec-20.
Transportation as the 2nd highest growth of inflation
The government has removed the collective leave days in the last weeks of Dec-20 to halt people go traveling. However, Google Mobility Report showed the increase of mobility over months. Related to transportation, more people went to transit stations (subway, bus and train station, etc) where the mobility in Dec-20 is 5% higher than in Nov-20. This showed that PSBB lose its effectiveness in halting mobility. Due to the higher demand, transportation basket price increased by 0.46% MoM (-0.85% YoY) and contributed the second highest inflation at 0.06%. Interestingly, all of subsectors in transportation basket showed higher price except the expedition that decreased by 0.1% MoM.
High realization of social assistance stimulus
Stimulus may help the economy to bring the inflation back. For the social assistance stimulus, the budget realization has achieved 98.5% as of Dec 28th. Ministry of Social Affairs claimed that the budget realization has reached Rp125.3 tn. The food package program or non-cash food assistance (BPNT) amounted to Rp41.6 tn (97.6% of Rp42.59 tn). The Family Hope Program (PKH), social aid in the form of staple food and cash aid for Non-PKH recipients absorbed the full budget or 100% valuing Rp36.7 tn, Rp4.51 tn and Rp4.5 tn, respectively. In addition, the food package program for Jabodetabek residents achieved Rp6.5 tn or 98.4% from the target.
Expecting higher inflation in 2021
As the economy starts to rev up, the inflation will follow as the demand side starts to recover as well. Since Oct-20, we have predicted the inflation will be at 1.72% YoY in YE 2020. It turned out to be slightly higher than the actual inflation eventually. However, we still hold our estimation that in YE 2021 it will reach 3.0% YoY or back to the Indonesia normal inflation rate in past years. We remain optimistic that the inflation will be back to normal as the household demand starts to recover and the liquidity injection that BI created in 2020 through burden sharing especially. Besides, the higher inflation expectation itself will drive the actual inflation to rise. The expectation plays important role as people will buy goods and services before the price rises and increase the demand of the products. Unfortunately, production usually lags behind then the supply cannot catch up quickly to meet the recovering demand. Although the wide room for rate cut remains, we see that BI will do the wait and see approach in the beginning of 2021. Thus, we believe BI will hold its rate at 3.75% in Jan 20th - 21st BoG Meeting.