Rice field 7890204   copy

ECONOMIC UPDATE - Inflation dips due to harvest season

Volatile food prices cause monthly inflation to ease

According to Statistics Indonesia (BPS), the monthly inflation rate slowed to 0.25% MoM in Apr-24 from 0.52% MoM in Mar-24, slightly below both our and consensus expectations of 0.28% MoM and 0.30% MoM respectively. This slowdown was mainly due to the harvest season. The food, beverages and tobacco basket deflated by -0.03% MoM, contributing -0.01% to the headline inflation rate. Conversely, the transport basket became the largest contributor to the monthly inflation rate, rising by 1.33% MoM, mainly due to the Eid-Al-Fitr holiday. In addition, volatile food prices fell to -0.31% MoM in Apr-24, the lowest level since Oct-22. On the other hand, administered prices rose to 0.62% MoM in Apr-24, the highest level since Apr-23, mainly due to air ticket price hikes. Meanwhile, core inflation rose to 0.29% MoM in Apr-24, also the highest level since Apr-23, mainly due to gold price hikes. Looking ahead, we expect inflation to slow this month, mainly due to normalisation after the Eid-al-Fitr festivities.


Inflation decelerate to 3.00% YoY

The annual inflation rate eased to 3.00% YoY in Apr-24, down from 3.05% YoY in Mar-24, slightly below both our estimate and consensus of 3.03% YoY and 3.10% YoY, respectively. Moreover, this rate remains within the target range for 2024 of 1.5%–3.5% YoY. Notably, the food, beverage, and tobacco basket emerged as the highest contributor to the inflation rate at 1.98% YoY. However, this basket's price decelerated to 7.04% YoY in Apr-24, compared to the previous month at 7.43% YoY. Meanwhile, volatile food inflation slowed to 9.63% YoY in Apr-24 (vs. 10.33% YoY in Mar-24), driven by a decrease in foodstuff prices to 8.01% YoY in Apr-24 (vs. 8.54% YoY in Mar-24). On the other hand, core inflation rose to 1.82% YoY compared to the previous month at 1.77% YoY, slightly surpassing both our estimate and the consensus estimate of 1.80% YoY and 1.77% YoY, respectively. Additionally, administered prices rose to 1.54% YoY in Apr-24 (vs. 1.39% YoY in Mar-24), supported by higher energy prices at -0.33% YoY in Apr-24 (vs. -0.35% YoY in Mar-24). Looking ahead, the government needs to prepare for La Niña, which brings heavy rains. According to the Meteorological, Climatological, and Geophysical Agency, La Niña is expected between June and August. These intense rainy seasons can lead to floods and crop failures, resulting in increased food prices. Furthermore, we anticipate the annual inflation rate to be 3.01% YoY in FY24.


Inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups rose in April, namely: food, beverages, and tobacco group of 7.04% YoY; clothing and footwear group of 0.67% YoY; housing, water, electricity, and household fuel group of 0.50% YoY; furnishings, household equipment, and routine household maintenance group of   0.99% YoY; health group of 2.08% YoY; transportation group of 1.33% YoY; recreation, sport, and culture group of 1.58% YoY; education group of 1.72% YoY ; food and beverage serving services/restaurant group of 2.47% YoY; and personal care and other services group of 4.31% YoY. Meanwhile, the information, communication, and financial services group edged down to -0.13% YoY.


Navigating monetary policy amid global risk

Bank Indonesia's Board of Governors Meeting, held on April 23-24, 2024, agreed to increase the BI Rate by 25 bps to 6.25%. Additionally, the Deposit Facility (DF) rate and Lending Facility (LF) rate were raised by 25 bps each to 5.50% and 7.00%, respectively. This rate adjustment aims to bolster the stability of the rupiah exchange rate amidst escalating global risks. It also serves as a preemptive measure to ensure that inflation remains within the target range of 2.5% ± 1% for the years 2024 and 2025, in line with a pro-stability monetary policy stance. Furthermore, Bank Indonesia (BI) has outlined three scenarios regarding potential decreases in the Federal Reserve's Federal Funds Rate (FFR). Firstly, there is a high likelihood that the Fed will commence reducing its interest rates by 25 bps in Dec-24. Secondly, BI forecasts that the FED will cut its rate by 50 bps in 2025. Lastly, the third scenario suggests that the Fed's benchmark interest rate will decrease by 25 bps in 2025. Looking ahead, we expect BI to keep the interest rate steady at 6.25% until the year-end, given global financial uncertainties. Cutting interest rates could potentially cause capital outflows, resulting in Rupiah depreciation, while raising rates might dampen economic growth. Currently, the Rupiah has depreciated by 5.59% YtD to Rp16,260/USD, surpassing the macroeconomic assumption of Rp15,000/USD in the 2024 State Budget (APBN).