Statistics Indonesia (BPS) recorded 0.02% MoM (+2.06% YoY) of deflation in Feb-22. The inflation rate was way lower than our estimate at 2.21% YoY and Bloomberg consensus at 2.30% YoY. However, year-to-date inflation is still within Bank Indonesia (BI) target at 3±1% YoY. Previously, we already saw there would be any chance of deceleration of inflation rate due to the limited household consumption under Covid-19 3rd wave in 1Q22. Moving forward, we see the inflation rate will go higher for sure in 2Q22 assuming the government successfully pulls the Covid-19 containment. Besides, some prices on food basket will be higher manageably because the shortage of supply triggered by Russia-Ukraine conflict.
Biggest contributor of deflation
The biggest growth and contributor of deflation was food, beverage and tobacco basket where it contributed 0.22% to the deflation and slipped by 0.87% MoM (+2.51% YoY). The main determinant of deflation in this basket was cooking oil at 0.11% followed by chicken meat at 0.06% and cayenne chili at 0.05% to total inflation. Despite of several staples price hike in the end of Feb-22, these staples recorded a deflation because the high-base effect from Jan-22 after several big days in Jan-22 ended. Normalization of chicken feed also happened in Feb-22.
Russia-Ukraine conflict impact
The challenge may occur in Mar-22 inflation figure as several staples are facing shock due to the disturbed supply from Russia and Ukraine during the conflict. Ukraine is the top three wheat suppliers for Indonesia. Ukraine supplied as much as 2.96 mn ton reaching USD707.6 mn in FY 2020. This may be mitigated easily as Indonesia recorded jump in wheat imports from Australia, Brazil, Argentina, Canada and India in Jan-22. However, for noodle and bread producers, wheat produced by Russia and Ukraine are significantly cheaper. We see the government can stabilize this shock by compensating wheat imports decline due to both countries conflict from Indonesia other trade partners.
Carry on under the 3rd wave
As of Mar 1st 2022, there were additional 24,728 new cases of Covid-19 in Indonesia. Thus, the total confirmed cases reached 542,441 cases. Besides, more than 344 mn doses of the vaccines have been administered. Thus, Indonesia has vaccinated about 53.6% of the population with second dose. The promising result of Covid-19 handling in Indonesia brings brighter prospect to the economy. This was reflected by Consumer Confidence Index (CCI) in Indonesia where it got higher to 119.6 in Jan-22 (vs. 118.3 in Dec-21). On the other hand, we see the government is reluctant in imposing Level 4 PPKM on big cities if there has not been a big case explosion of Covid-19 in the particular region. Thus, it will let the household consumption to grow slowly and it leads to the higher inflation in Mar-22.
BI-7DRRR stays unchanged
We remain optimistic that the inflation in 2022 will stay manageable where we still hold our estimate of inflation at 3.6% YoY for YE 2022 as the household consumption recovers faster than we predict before. Moreover, the severity of Omicron variant is more benign than previous variants. In addition, we see the impact of Russia-Ukraine conflict towards domestic inflation remains benign if the conflict just remains on the current scale. Thus, we see BI will hold the rate at the current level on March 16th – 17th 2022 to stay accommodative and to keep the market stays alluring.