In Sep-21, Statistics Indonesia (BPS) recorded the second deflation this year at 0.04% MoM but still recorded 1.60% YoY of inflation in Sep-21 due to the still-weak purchasing power. The price level was lower than our estimate and Bloomberg consensus of 1.67% YoY and 1.66% YoY, consecutively. We thought the food prices would contribute more like usual after people got used to with the prolonged PPKM. In fact, food prices faced a deflation due to the preference of frugal living during pandemic. Thus, it led to oversupply of foods. Aligned with our previous view, the ongoing level-based PPKM has subdued the inflation in 3Q21 despite the relaxation on the PPKM over time. Thus, there will be no threat of inflation in near future as it is also below Bank Indonesia (BI) target for a 14th straight month.
Oversupply of foods
The biggest contributor of deflation was food, beverage and tobacco at 0.12% where it decreased by 0.47% MoM (+0.52% YoY). The main determinant of deflation in this basket was egg at 0.07% followed by cayenne and shallot at 0.03% of deflation. On the other hand, cooking oil brought 0.02% of inflation in this basket, just like the previous month. The Provincial Government of DKI Jakarta explained that the price decline due to the oversupply of production especially egg and cayenne. Meanwhile, the level of people's purchasing power remained constant. Moreover, the distribution from producers had returned smooth so the prices fell deeper.
High price on food and beverage provider
The biggest contributor of inflation in Sep-21 was food and beverage provider (restaurant) basket that contributed 0.02% of inflation. Besides, it also recorded the highest growth of inflation at 0.25% MoM (2.67% YoY). This is the consequence of the relaxation on restaurants and café during the Level 3 PPKM in Sep-21. People visited restaurants more so it increased the processed food and beverage price.
Vaccine helps the inflation to grow
Last week, Indonesia's new daily cases averaged 1,935 or dropped from over 2,355 the previous week. This is a significant improvement as previously Indonesia experienced a peak of around 50,000 new daily cases in mid Jul-21. As of Sep, 28th 2021, as many as 88,531,137 Indonesians have received their first vaccinations and 49,655,718 people have received their second vaccinations. Thus, Indonesia has vaccinated about 32.5% of the population. Based on our estimation, it will take further 70 days to administer enough doses for another 10% of the population. Thus, if and only if the government increases the pace of vaccination, we see that target of herd immunity in Mar-22 can be achieved. 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 stays unchanged
Even though international institutions such as World Bank and World Health Organization praised Indonesia for its success in curbing Covid-19 cases, the pandemic is still there. However, we still maintain our estimate on inflation at 3% in YE 2021 as there will be threat from the shortage of imported commodities or raw material for industries if other countries resume their lockdowns. All in all, the price pressure is expected to remain benign in 2021. Thus, we see BI will hold the rate at the current level on Oct, 18th – 19th 2021 to keep the market stays alluring and to maintain the capital flow.