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ECONOMIC UPDATE - Inflation - The inflation rate cools to the slowest pace since February-22



Monthly inflation rebounds on rice and fuel prices

According to Statistics Indonesia (BPS), the monthly inflation rate accelerated to 0.19% MoM in September, after recording August's deflation rate of -0.02% MoM. Additionally, this rate exceeded both our projection of 0.17% MoM and the consensus estimate of 0.12% MoM. The primary factor behind this inflation was the food, beverage, and tobacco basket, which contributed 0.09% MoM to the inflation rate. This basket experienced an acceleration of 0.35% MoM, primarily due to the rice price hike. Besides, the transportation group displayed the second highest growth, recording a 0.29% MoM increase and contributing 0.04% MoM to the inflation rate. This pattern aligns with the government intervention, which increased the price of non-subsidized fuels such as Pertamax, Pertamax Turbo, Dexlite, and Pertamina Dex. Furthermore, the core inflation rate for September was reported at 0.12% MoM, slightly below the previous month's figure of 0.13% MoM. In addition, volatile food prices demonstrated an inflation rate of 0.37% MoM, reversing August's deflation of -0.51% MoM. Meanwhile, administered prices experienced an inflation rate of 0.23% MoM, in contrast to the deflation rate of -0.02% MoM in the previous month.


Slower yearly pace due to high base effect

On a yearly basis, the inflation rate in September was recorded at 2.28% YoY, indicating a slower pace compared to the previous month's rate of 3.27% YoY. This inflation rate hits the slowest pace since February 2022. Moreover, this rate remains within the central bank's target inflation range of 2%–4%, marking the fifth consecutive month within the target range. However, the inflation rate was higher than both our projected estimate and the consensus, with figures of 2.25% YoY and 2.22% YoY, respectively. Notably, the food, beverage, and tobacco basket exhibited the highest growth and was the biggest contributor to the inflation rate, rising by 4.17% YoY and contributing 1.08% YoY to the inflation rate. Meanwhile, the personal care and other services group, as the second highest group experienced inflation, recording a rate of 2.40% YoY and contributing 0.21% YoY to the inflation rate. The yearly inflation rate decreased, despite the fact that on a monthly basis the inflation rate increased. This was primarily due to the high base effect in September 2022. The headline inflation rate in September 2022 was recorded at 5.95% YoY, marking the hottest inflation rate since October 2015. Furthermore, core inflation reported a value of 2.00% YoY, falling below both our estimated value of 2.01% YoY and the consensus estimate of 2.07% YoY. September's core inflation rate decelerated compared to the previous month’s rate of 2.18% YoY. We have revised our inflation rate forecast to 3.2% YoY by the end of 2023, driven by the consistency in monetary policy and the cooperative efforts between central and regional governments in controlling food prices. However, we remain cautious about potential inflationary pressures stemming from factors such as El Niño, rising oil prices, and a weakening Rupiah.


Inflation rate by expenditure groups

On a yearly basis, all of the expenditure groups increased in September, namely: food, beverages, and tobacco group of 4.17% YoY; clothing and footwear group of 0.98% YoY; housing, water, electricity, and household fuel group of 1.26% YoY; furnishings, household equipment, and routine household maintenance group of 1.97% YoY; health group of 2.14% YoY; transportation group of 0.99% YoY; recreation, sport, and culture group of 1.58% YoY; education group of 2.08% YoY; food and beverage serving services/restaurant group of 2.40% YoY; personal care and other services group of 3.68% YoY; and the information, communication, and financial services group reported a deflation of 0.06% YoY.


Maintaining Rupiah stability amidst the FED’s hawkish stance

The latest Federal Open Market Committee (FOMC) meeting indicates that the Fed has maintained the Federal Funds Rate (FFR) at 5.25% – 5.50%, in line with our expectations and the consensus. This also reinforces the expectation of a "higher for longer" stance. The market responded to this more hawkish stance with the yield on the 10-year U.S. Treasury (UST) moving up to 4.5% (+0.7% YtD), and the U.S. Dollar index now at 105 as of Septemeber-2023, its highest level throughout 2023. Bank Indonesia (BI) needs to maintain the exchange rate in order to tame the inflation of imported goods. However, the opportunity for BI to cut interest rates amidst the hawkish stance of the Federal Reserve in the near future is currently very limited. Nevertheless, there is also insufficient reason for BI to raise interest rates, as inflation is already at its target level. Therefore, we believe BI's decision to maintain the interest rate at 5.75% until the end of 2023 is a reasonable step. To address pressure on the Rupiah, BI continues to manage the foreign exchange and bond markets. BI is now heavily using quantity-based (instead of rate-based) interventions, most recently with the introduction of the SRBI to “mop up” excess Rupiah liquidity if needed. This instrument has raised Rp37.7 tn in just two auctions, highlighting significant excess liquidity and strong demand for highly liquid short-term securities in the local money market.