ECONOMIC UPDATE - Inflation - Direct impact of fuel price hike



7-year high of inflation

Statistics Indonesia (BPS) recorded inflation at 1.17% MoM (5.95% YoY) in Sep-22. It was slightly higher than our estimate at 5.92% YoY but marginally lower than consensus at 6% YoY. This is the biggest leap of inflation in nearly seven years for Indonesia. Obviously, the jumping inflation occurred due to subsidized fuel price hikes in the beginning of Sep-22 amid the rising global oil price. Thankfully, the jump of inflation was not followed by the food inflation (-0.68% MoM), which usually has the significant impact towards the headline inflation, due to the big harvest season in Aug-Sep 2022.


Fuel price stirs up inflation

The inflation was caused by the higher fuel prices, leading to the elevated cost of transportation where it rocketed by 8.88% MoM (16% YoY) contributing 1.08% to total inflation. This is the direct impact of the subsidized fuel price hikes around 30% in early Sep-22 as the government moved to rein the swelling energy subsidy. Based on the component of this transportation basket, fuel contributes 82.4% of total transportation inflation. However, BPS warned the inflation could heat up next month as several regions have not yet increased their transportation fares. We expect the second-round impact of fuel price hike will continue towards the inflation over the next 2-3 months as the inner-city and cross-city transportation fares are going to adjust the price.


Big harvest brings deflation

Despite of the high inflation, food, beverage, and tobacco basket recorded a deflation where it plunged by 0.3% MoM but still increased on yearly basis at 7.91% YoY. The main determinants of deflation were shallot contributing 0.06% to total deflation followed by red chili by 0.05%. Not only both commodities, several food staples posted a monthly deflation as well due to higher production and improved supply: cooking oil, tomato, and red chili. Indonesia is blessed with the big harvest season in Aug-Sep 2022. We still expect the food prices will stay low-moderate in Oct-22.


Another BI-7DRRR hike

The inflation may be peaking in 4Q22 where we expect it may achieve 6.74% YoY in YE22. It will be manageable around 6% as the food supplies start to normalize and the monetary policy will take effect eventually. The downside risk comes from the anomaly rice price hike in Sep-22 that may be risking the inflation next months. Until now, stable rice price has been anchoring the inflation, but not with Sep-22. We analyze the problem lays beneath the higher Government Purchasing Price (HPP) where it distorts the market price. Hopefully, the government reassess its decision on the HPP so the rice price can go down again in 4Q22. However, the core inflation has been two months above the favorable level so this is also may be a hint for Bank Indonesia (BI) to raise the interest rate by 25 bps this month on October, 19th – 20th 2022.