Still below BI target
Statistics Indonesia (BPS) recorded inflation at 0.08% MoM (1.52% YoY) in Jul-21 although the government enacted the partial lockdown policy or the stricter Restrictions on Public Activities (PPKM Darurat) in Jul-21. The inflation figure was higher than our estimate and Bloomberg consensus of 1.44% YoY and 1.47% YoY, consecutively. The unanticipated inflation came from higher prices for medicines and medical supplies. Even though the inflation picked up pace during the lockdown, we see the new level-based PPKM may subdue the inflation in 3Q21 followed by the high Covid-19 cases in Indonesia. Thus, there will be no threat of inflation in near future as it is also below target for a 12thstraight month due to the still-weak consumption.
Food contributes the most
The biggest contributor of inflation was food, beverage and tobacco at 0.04% where it increased by 0.15% MoM (2.74% YoY). The main determinant in this basket was cayenne at 0.03% followed by tomato, red chili and shallot at 0.01% of inflation. On the other hand, chicken and egg brought 0.04% and 0.01% of deflation in this basket. Our previous prediction for Jul-21 that food prices would be lower was wide of the mark because in fact, some commodities got higher prices as the suppliers faced difficulties on the distributions due to the changes in market operating hours and mobility restrictions in Jul-21. However, under level-based PPKM, we expect the distribution of foods to the market can go back “normal” like before PPKM Darurat.
Healthcare basket brings highest growth
The highest price surge came from healthcare basket that contributed 0.01% of inflation, increasing at 0.24% MoM (1.87% YoY). More detail, medicines and health products as a subgroup of this basket increased by 0.47% MoM. Taking notes from India case, the increase of health expense will result in a squeeze of expenditure on other items of discretionary consumption (Radhakrishman, 2021). Thus, if the price surge on healthcare persists for some months ahead, we may see the current household spending pattern during the pandemic will persist longer. In other word, the spending pattern is getting more inelastic although the government eases the PPKM level.
Vaccine helps the inflation to grow
As of July, 31st 2021, as many as 47,226,514 Indonesians have received their first vaccinations and 20,534,823 people have received their second vaccination. Thus, Indonesia has vaccinated about 12.5% of the population. Last week, Indonesia averaged about 754,286 doses administered each day. At that rate, it will take a further 72 days to administer enough doses for another 10% of the population. The government is pursuing the herd immunity in 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 stays unchanged
Under the level-based PPKM, we see there will be no much change on the inflation. However, we still maintain our estimate on inflation at 3% in YE 2021 as there will be threat from the shortage of imported commodities or raw material for industries if other countries resume their lockdowns. All in all, the price pressure is expected to remain benign in 2021 so there is no need of monetary policy to intervene. Thus, we see BI will hold the rate at the current level on Aug, 18th – 19th 2021 to keep the market stays alluring and to maintain the capital flow.