In Aug-21, Statistics Indonesia (BPS) recorded inflation at 0.03% MoM (1.59% YoY) or showed a slower growth due to the ongoing level-based lockdown policy (PPKM). The inflation figure was higher than our estimate and Bloomberg consensus of 1.57% YoY and 1.52% YoY, consecutively. We thought the food prices would contribute more like usual. In fact, food prices faced a deflation. However, we have anticipated the price hike in education basket due to the new school year started in Jul-Aug 2021. Moving forward, we see the ongoing level-based PPKM may subdue the inflation in 3Q21 despite the relaxation on the PPKM over time. Thus, there will be no threat of inflation in near future as it is also below target for a 13th straight month due to the still-weak consumption.
Back to school
The biggest contributor of inflation in Aug-21 was education basket that contributed 0.07% of inflation. Besides, it also recorded the highest growth of inflation at 1.20% MoM (2.26% YoY). More detail, intermediate education as a subgroup of this basket recorded the highest inflation among all subgroup by 2.07% MoM. This is normal price hike because new school year just started in Jul-Aug or even Sep-21 for some educational institutions in Indonesia. Indonesia started the school year with caution during the pandemic. Thus, the majority of school is not allowed to do the offline course yet. As the consequence, the price of transportation basket will subdue as well since the students do the online course.
Food contributes the least
The biggest contributor of deflation was food, beverage and tobacco at 0.08% where it decreased by 0.32% MoM (3.31% YoY). The main determinant of deflation in this basket was cayenne at 0.05% followed by chicken and chili at 0.04% of inflation. On the other hand, cooking oil brought 0.02% of inflation in this basket. Our previous prediction for Jul-21 that food prices would be lower, but in fact, it increased due to the shortage as the suppliers faced difficulties on the distributions under the PPKM in Jul-21. That our previous prediction was actually just lagging and the price slow-down happened in Aug-21 instead because the suppliers have already found the way to deliver the staples. Just like our previous prediction, under level-based PPKM, the distribution of foods to the market can go back normal.
Vaccine helps the inflation to grow
Last week, Indonesia's new daily cases averaged 11,600 or dropped from over 16,000 the previous week. This is a significant improvement as previously Indonesia experienced a peak of around 50,000 new daily cases in mid Jul-21. As of Aug 31, 2021, as many as 63,111,288 Indonesians have received their first vaccinations and 35,855,211 people have received their second vaccinations. Thus, Indonesia has vaccinated about 17.7% of the population. Based on our estimation, it will take further 70 days to administer enough doses for another 10% of the population. Thus, if and only if the government increases the pace of vaccination, we see that target of herd immunity in Mar-22 can be achieved. 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
Eventually, inflation can be stronger as the Covid-19 cases are decreasing especially under the level-based PPKM. 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. Thus, we see BI will hold the rate at the current level on Sep, 20th – 21th 2021 to keep the market stays alluring and to maintain the capital flow.