Monthly inflation rate hits the lowest level since November 2022
According to Statistics Indonesia (BPS), monthly inflation rate decelerated to 0.09% MoM in May, slower than the April rate of 0.33% MoM, and hit the lowest rate since November last year. This figure was also below our estimate and consensus of 0.25% MoM and 0.34% MoM, respectively. We think the low inflation rate is affected by the end of Eid Al-Fitr holidays in April, thanks to the transportation basket, which recorded a deflation of -0.56% MoM and contributed -0.07% MoM to the inflation rate. Besides, the clothing and footwear basket reported a deflation of -0.46% MoM and contributed -0.02% MoM to the inflation rate, reflecting the lower clothing and footwear demand compared to the previous month. On the other hand, the highest contributor to May’s inflation rate was the food, beverages, and tobacco basket, which contributed 1.13% MoM to the inflation rate and grew by 0.48% MoM. Furthermore, the core inflation rate decelerated from 0.25% MoM in April to 0.06% MoM in May, lower than our estimates of 0.18% MoM.
The yearly inflation rate hits the upper limit of central bank’s target
On a yearly basis, the inflation rate was reported at 4.00% YoY in May, the lowest level since May last year, and hit the upper limit of the central bank's 2-4% target. The inflation rate was also lower than our estimate of 4.15% YoY and the consensus of 4.26% YoY. However, we think the inflation rate will rebound this month due to national and religious holidays, we believe the holidays would trigger the transportation basket to increase this month. Furthermore, the basket with the highest growth and the biggest contributor to the inflation rate in May was the transportation basket, where it contributed 1.29% YoY to the inflation rate and rose by 10.62% YoY. On the other hand, the information, communication, and financial services basket recorded a deflation of -0.27% YoY and contributed -0.01% YoY to the inflation rate. Meanwhile, core inflation was below our estimate and consensus of 2.77% YoY and 2.82% YoY, respectively.
Inflation rate by expenditure groups
On a yearly basis, most of the expenditure groups increased in May, namely: food, beverages, and tobacco group of 4.27% YoY; clothing and footwear group of 1.54% YoY; housing, water, electricity, and household fuel group of 2.48% YoY; furnishings, household equipment, and routine household maintenance group of 3.03% YoY; health group of 2.52% YoY; transportation group of. 10.62% YoY; recreation, sport, and culture group of 2.18% YoY; education group of 2.75% YoY; food and beverage serving services/restaurant group of 3.38% YoY; and personal care and other services group of 4.48% YoY. On the other hand, the information, communication, and financial services group reported a deflation of -0.27% YoY.
Information and communication equipment support deflation
The information, communication, and financial services group reported a deflation of -0.27% YoY in May. It was reflected by a decrease in the index from 99.86 in May 2022 to 99.59 in May 2023. Moreover, this group contributed -0.01% YoY to the inflation rate. This group consists of three subgroups: information and communication equipment, information and communication services, and financial services. The information and communication equipment subgroup reported a deflation of -1.43 % YoY. On the other hand, the information and communication services subgroup recorded an inflation rate of 0.06% YoY. Meanwhile, the financial services subgroup remained the same.
The main transportation commodities contributing to inflation
On a yearly basis, the transport group became the highest contributor to May's inflation, contributing 1.29% YoY to the inflation rate. The main transportation commodities contributing to the yearly inflation in May were gasoline at 0.91% YoY, intracity transport at 0.09% YoY, intercity transport and cars at 0.04% YoY, and diesel fuel at 0.03% YoY. On a monthly basis, the main transportation commodities contributing to May's inflation were airfares at 0.06%, and intercity transport at 0.02%.
Revise down our BI7DRRR forecast of 5.25%
Bank Indonesia (BI) kept the benchmark rate (BI 7DRRR) at 5.75% on May-23, maintaining a stable stance since Jan-23. BI thinks this rate is sufficient to meet its core inflation in the range of 3±1% in 1H23 and bring headline inflation back to the range of 3±1% in 2H23, signaling that the central bank is ending its period of monetary tightening. Besides, Rupiah is relatively stable, with foreign exchange reserves are adequate to cushion any potential short-term shocks. As a result, we think BI will cut BI7DRRR by 50 bps to 5.25% in 4Q23. Meanwhile, we expect the inflation rate of 3.96% YoY this year.