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ECONOMIC UPDATE - Inflation - March inflation slows more-than-expected



The monthly inflation rate slightly increased

According to Statistics Indonesia (BPS), the monthly inflation rate climbed by 0.18% MoM in March, slightly higher than the February rate of 0.16% MoM. This level was below our estimate and consensus of 0.31% MoM and 0.26% MoM, respectively. However, the consumer price index (CPI) inflation rate decelerated from 5.47% YoY in February to lowest rate in seven months of 4.97% YoY in March, lower than our estimate of 5.07% YoY and the consensus of 5.06% MoM. In addition, the core inflation rate inched up to 0.16% MoM in March compared with the previous month of 0.13% MoM, surpassing our estimates of 0.14% MoM. Meanwhile, the biggest contributor of March’s inflation rate was the food, beverage, and tobacco basket that contributed 0.09% MoM to the inflation and grew by 0.35% MoM. 


Yearly inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups increased in March, namely: food, beverages, and tobacco group of 6.05% YoY; clothing and footwear group of 1.18 % YoY; housing, water, electricity, and household fuel group of 2.74% YoY; furnishings, household equipment, and routine household maintenance group of 3.72% YoY; health group of 2.65% YoY; transport group of 13.72 % YoY; food and beverage serving services/restaurant group of 4.00% YoY; and personal care and other services group of 4.74% YoY. On the other hand, the information, communication, and financial services group recorded a deflation of -0.23% YoY. 


Municipal waterworks (PDAM) tariff supports deflation

On a monthly basis, the housing, water, electricity, and household fuel basket, and the information, communication, and financial services basket recorded deflation. The housing, water, electricity, and household fuel basket contributed to the total monthly deflation of -0.05% MoM, and this price slipped by -0.26% MoM. The main contributor to this basket was the municipal water (PDAM) tariff which deflated by -0.07% MoM. Moreover, the basket of information, communication, and financial services reported deflation of -0.03% MoM. However, this basket did not significantly contribute to the total monthly deflation. 


Inflation seen rising this month

We believe inflation rate would be typically higher during Ramadan, which this year started in late March, and leading up to the Eid al-Fitr celebrations in April. The food, beverage and tobacco group became the biggest contributor of inflation in Ramadan and Eid last year (April 2022) with a contribution to inflation of 0.46% MoM and rose by 1.76% MoM. Besides, the government should anticipate the transportation price hike as this sector contributed 0.29% MoM to the inflation and elevated by 2.42% MoM last year. 


BI holds BI-7DRRR but might consider a change in stance

Bank Indonesia (BI) maintained the benchmark rate (BI 7DRRR) unchanged at 5.75% in March-23, keeping a stable stance since Jan-23. BI argues this rate is sufficient to meet its inflation target. We acknowledge that inflation has reached its peak and consistently declining towards 4%, signifying no interest rate hike in 1Q23. However, we retain our view for another 25 bps hike to 6.0% in 2Q23-3Q23 as a response to the narrow spread rate between BI-7DRRR and FFR. Furthermore, we forecast the inflation rate of 3.96% YoY this year, in line with upper band of Bank Indonesia’s  inflation target of 4%.