Higher but not concerning
Statistics Indonesia (BPS) recorded the inflation at 0.32% MoM (1.68% YoY) in May-21 where all categories in the CPI basket increased. It was lower than our estimation but higher than Bloomberg consensus. May was featured by national holiday, post-fasting festivity of Eid and commodity prices fueling up the inflation. The inflation was the highest since Dec-20 but remained below Bank Indonesia (BI) target at 2-4% YoY. Despite the slight pickup in core inflation as well, the inflation was still manageable so there is no need to stressing out the inflation. The inflation was also below target for a 10th straight month due to the still-weak consumption.
Price hike on food
The biggest contributor of inflation was food, beverage and tobacco at 0.1% where it increased by 0.38% MoM (3.05% YoY), followed by transportation at 0.08%, increasing at 0.71% MoM (0.85% YoY) as the highest growth among all basket of goods. The main price hike contributors in this basket were chicken and fish (0.04%). On the other hand, red chili (-0.07%) and cayenne (-0.05%) contributed to the deflation in this basket. Moving forward, we are expecting the lower food prices in Jun-21 because there will be no significant determinant of price changes in Jun-21. However, the price of chicken could be the game changer on this basket as the culling program in 1Q21 may still be impactful.
Vaccine helps the inflation to grow
As of May, 27th 2021, as many as 16,413,672 Indonesians have received their first vaccinations and 10,631,835 people have received their second vaccination. With the arrival of its second shipment of the AstraZeneca vaccine containing 3.8 mn doses on end of Apr-21, Indonesia has received a total of 4.9 mn doses of the vaccine. Overall, Indonesia has received 65.5 mn doses of the Sinovac bulk vaccine and 8,448,000 dose vials combined from Sinovac, Sinopharm and the AstraZeneca's COVAX Facility. The government is pursuing the herd immunity that should be achieved by Mar-22. By having more people vaccinated, we see that the inflation will be higher in a slow path onwards as slow as the demand side recovers.
BI-7DRRR remains the same
We see the inflation ticked up simply due to the end of Eid and also the holiday allowance or “THR” in May-21. The increase of inflation is not concerning as we believe this will be temporary as long as the household consumption is not boosted by any kind of significant stimulus or event. Thus, we see the inflation remains cool in the short run. However, we see in the medium run or in the YE 2021, inflation will be at 3% or lower. We see BI will hold the rate at the current level on June 16th – 17th 2021 to keep the market stays alluring and to maintain the capital flow. Besides, the price pressure is expected to remain benign in 2021 so there is no need to adjust the rate.