ECONOMIC UPDATE – Inflation - Post Eid and harvest season push inflation down

Monthly inflation rate eases to lowest level since Oct-22

According to Statistics Indonesia (BPS), the monthly inflation rate slowed to -0.03% MoM in May-24 from 0.25% MoM in Apr-24, below both our expectations and consensus forecasts of 0.07% MoM and 0.06% MoM, respectively. This deflation marks the slowest rate since Oct-22. The slowdown was mainly due to the harvest season and normalization of prices after Eid al-Fitr. The food, beverages and tobacco basket deflated by -0.29% MoM, contributing -0.08% to the headline inflation rate. Meanwhile, the transport basket deflated by -0.36% MoM, contributing -0.04% to the monthly inflation rate. In May 24, volatile food prices fell by -0.69% MoM, the lowest level since October 22. Administered prices decreased by -0.13% MoM in May-24, the lowest level since Jan-24, mainly due to the normalization of air ticket prices after Eid al-Fitr. On the other hand, core inflation increased slightly to 0.17% MoM in May-24, mainly due to a 0.62% MoM increase in gold prices to USD 2,351/troy ounce. Looking ahead, we expect inflation to rise this month, mainly due to Eid al-Adha and the end of the harvest season. We expect the food, beverages and tobacco basket to be the main contributor to the inflation rate.


Inflation shrinks to 2.84% YoY

The annual inflation rate eased to 2.84% YoY in May-24, down from 3.00% YoY in Apr-24, falling below both our estimate and consensus of 2.98% YoY and 2.97 % YoY, respectively. The reading remains well within Bank Indonesia’s target range of between 1.5 and 3.5% for this year. Notably, the food, beverage, and tobacco basket emerged as the highest contributor to the inflation rate at 1.75% YoY. However, this basket's price decelerated to 6.18% YoY in May-24, compared to the previous month at 7.43% YoY. Meanwhile, volatile food inflation slowed to 8.14% YoY in May-24 (vs. 9.63% YoY in Apr-24), driven by a decrease in foodstuff prices to 6.80% YoY in May-24 (vs. 8.01% YoY in Apr-24). On the other hand, core inflation rose to 1.93% YoY compared to the previous month at 1.82% YoY, surpassing both our estimate and the consensus estimate of 1.87% YoY and 1.85% YoY, respectively. Additionally, administered prices slightly eased to 1.52% YoY in May-24 (vs. 1.54% YoY in Apr-24), supported by deflation energy prices at -0.32 % YoY in May-24. Looking forward, the government needs to prepare for the consequences of OPEC+'s oil production cuts and the La Niña phenomenon. On Sunday, OPEC+ decided to extend their voluntary production cut of 2.2 mn barrels of crude oil per day until 2025. Furthermore, the WTI oil price rose by 7.39% to USD79.0/bbl in May-23. Meanwhile, the World Meteorological Organization (WMO) warned of the potential for significant global storms due to the shift from El Niño to La Niña. Moreover, WMO forecast that La Niña to occur between June and August.


Inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups rose in May, namely: food, beverages, and tobacco group of 1.75% YoY; clothing and footwear group of 0.06% YoY; housing, water, electricity, and household fuel group of 0.09%YoY; furnishings, household equipment, and routine household maintenance group of   0.04% YoY; health group of 0.06% YoY; transportation group of 0.17% YoY; recreation, sport, and culture group of 0.03% YoY; education group of 0.09% YoY ; food and beverage serving services/restaurant group of 0.25% YoY; and personal care and other services group of 0.31% YoY. Meanwhile, the information, communication, and financial services group edged down to -0.01% YoY.


BI maintains its rate amid global uncertainty

Bank Indonesia (BI) has opted to keep its benchmark rate steady at 6.25%, in line with expectations and consensus. This marks a stable key interest rate following an unexpected rate hike last month. Additionally, the deposit and lending facility rates also remain unchanged at 5.50% and 7.00%, respectively. The decision reflects BI's confidence in this rate's ability to keep headline inflation within the target range of 2.5±1% for 2024. Furthermore, it is consistent with the pro-stability focus of monetary policy aimed at strengthening rupiah stabilization. The rupiah has slightly appreciated by 0.06% MoM to Rp16250/USD as of May 31, 2024. We anticipate that BI will maintain the benchmark rate at 6.25% through the end of the year to support rupiah stability amid global uncertainties. BI may consider reducing the rate after the Federal Reserve does to prevent a significant capital outflow. In the meantime, BI is expected to continue with pro-growth macroprudential and payment system policies to promote sustainable economic growth. Recent US inflation data showed a slight decrease to 3.4% YoY in April, slightly down from 3.5% YoY in March, indicating a potential Fed rate cut in 4Q24. Consequently, we predict that BI will lower its rate in 1Q25.