ECONOMIC UPDATE - Inflation - First deflation in 2021

 

 

Deflation occurs

Statistics Indonesia (BPS) recorded a deflation for the first time in 2021 at 0.16% MoM in Jun-21. However, on yearly basis, the figure still showed inflation at 1.33%. It was lower than our estimate and Bloomberg consensus of 1.47% YoY and 1.45% YoY consecutively. The holiday-induced pressure on inflation after Eid has disappeared and it brought the price lower. The deflation happened before the new lockdown policy or the stricter Restrictions on Public Activities (PPKM Emergency) so we see deflation will remain in Jul-21. Moreover, we see the stricter partial lockdown may subdue the inflation in 3Q21 followed by the rising Covid-19 cases in Indonesia and other Asia countries. Thus, there will be no threat of inflation in near future as it is also below target for a 11^th straight month due to the still-weak consumption. 

 

Food and transportation become laggard 

The biggest contributor of deflation was food, beverage and tobacco at -0.18% where it decreased by 0.71% MoM (+1.85% YoY) as the biggest laggards. The main determinant in this basket was red chili and chicken, which contributed -0.09% and -0.06% of deflation. On the other hand, egg brought 0.02% of inflation in this basket. Similar with our previous prediction for Jun-21, we are expecting the lower food prices in Jul-21 as well because there will be no significant determinant of price changes in near future, even for 3Q21. 

 

Deflation on transportation as well

The second highest of deflation contributor was transportation by -0.04%, decreasing at 0.35% MoM (+0.09% YoY) as the price has already normalized after the Eid period. More detail, the biggest contributor of deflation was fares for the public transportation at -0.04%. Airline fares dipped and contribute the most at -0.03% towards the deflation. On the other hand, the vehicle price increased and contributed the biggest inflation at 0.01% from this component. 

 

Tax on vehicle plays part

Under the partial lockdown, we see the vehicle prices increase happened because the sales tax on luxury goods (PPnBM) at 0% for vehicles has ended on May, 31st 2021. Under the original PPnBM relaxation for cars 1,500 cc plan, the government bears 100% of the tax payment from Mar-May, then 50% from Jun-Aug and 25% from Sep-Nov 2021. However, in the second week of Jun-21, the government has extended the relaxation. The government will continue to fully bear the PPnBM of new cars with engine capacity of as much as 1,500 cc until Aug-21. Hence, the slight inflation of vehicle occurred in the first 2 week of Jun-21.

 

Vaccine helps the inflation to grow

As of June, 30^th 2021, as many as 29,279,412 Indonesians have received their first vaccinations and 13,465,499 people have received their second vaccination. Overall, Indonesia now has 83.9 mn doses of COVID-19 vaccines in total. The government is pursuing the herd immunity that should be achieved by Mar-22. By having more people vaccinated, we see that the inflation will be higher in a slow path onwards as slow as the demand side recovers. 

 

BI-7DRRR remains the same

We see the deflation simply happened due to the end of Eid, the minimum effect of the holiday allowance or “THR” in May-21 during partial lockdown and the low purchasing power. Thus, we see the inflation remains cool in the short run. However, we see in the medium run or in the YE 2021, inflation will be at 3% or lower. We see BI will hold the rate at the current level on July, 21^st – 22^nd 2021 to keep the market stays alluring and to maintain the capital flow. Besides, the price pressure is expected to remain benign in 2021 so there is no need to adjust the rate.