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ECONOMIC UPDATE - Inflation - Deflation on harvest season



Remains above BI’s inflation target

Statistics Indonesia (BPS) recorded a deflation at 0.21% MoM but still posted a 4.69% YoY of inflation in Aug-22. The rate was lower than our estimate and consensus at 4.85% and 4.87% YoY. The deflation occurred due to the big harvest season last month making the volatile food inflation plunged by 2.64% MoM (8.55% YoY vs. 10.9% YoY in Jul-22). However, the core inflation has already achieved 3.04% YoY or slightly surpassed the favorable level at 3% YoY. This may be a hint for Bank Indonesia (BI) to raise the interest rate again by 25 bps this month.


Eased food prices

The biggest contributor of deflation was food, beverage, and tobacco basket where it plunged by 0.21% MoM but still increased on yearly basis at 7.73% YoY. The main determinants of deflation were shallot contributing 0.15% to total deflation followed by red chili by 0.12%. Not only both commodities, several food staples posted a monthly deflation as well due to higher production and improved supply, namely chicken, beef, garlic, chilis, cooking oil, and sugar. This could be achieved as some production centers have started to improve and had a big harvest in the end of Jul-22 and Aug-22. Thus, we still expect the food prices especially the horticulture ones will continue to slightly ease in Sep-22 volatile food inflation figures.


Transportation also brings deflation

The deflation was also caused by the transportation sector where it decreased by 0.08% MoM contributing 0.01% to total deflation. Airfare has decreased due to the decline in avtur prices. As of Aug, 1st - 14th 2022, the price of avtur at Soekarno Hatta Airport for domestic flights has reached Rp15,570/liter, while the price for international flights was USD94.5/liter. Compared to the previous period of July, 15th -31st 2022, the price of avtur for domestic flights was Rp16,806/liter and USD102.5/liter for international flights. Besides, the government also waived the non-tax state revenue (PNBP) rates for aircraft landing and storage services. 


Seasonal pressure from school

On the other hand, the new school year put additional pressure on the headline inflation crawling up by 0.21% MoM contributing 0.1% to total inflation. The tuition fee for elementary, junior high, and college increased with their respective share of 0.02% to total inflation. However, we see the pressure from education sector will ease gradually for Sep-22 and ahead.


Pertalite and Solar to up, very soon

Ministry of Finance (MoF) revealed that the price of subsidized fuel, Pertalite and diesel (Solar) should be Rp14,450/liter and Rp13,950/liter, instead of the current price at Rp7,650/liter and Rp5,150/liter, respectively. This year, the government has increased the allocation of government subsidies from Rp170 tn to Rp502 tn due to the spike on oil prices above the government's initial assumption. In addition, the government also bears a larger subsidy for 3 kg LPG cylinders where the current price of 3-kg LPG cylinders is only Rp4,250/kg whereas the economic price is Rp18,500/kg. The discourse of the higher subsidized fuel prices has been widely discussed in Aug-22. The majority fractions in the House of Representative (DPR) disagree with the discourse by arguing the data of subsidy recipient has to be clear first before increase the fuel prices. However, we expect the government will start to cut the subsidy this month so we will adjust our inflation target for FY 2022 with the new fuel prices.


BI-7DRRR hike this month

We expect the inflationary pressure will ease in 4Q22 as the food supplies start to normalize and the monetary policy will take effect eventually. However, BI mentioned that the inflation may reach 5% YoY for YE 2022, above than BI’s target at 3±1%. With the core inflation reaching 3%, we expect BI will increase the rate again for 25 bps on September, 21st – 22nd 2022.