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ECONOMIC UPDATE - Inflation - Challenges ahead



Jump of inflation

Statistics Indonesia (BPS) recorded 0.66% MoM (2.64% YoY) of inflation in Mar-22. The inflation rate was higher than our estimate at 2.61% YoY and Bloomberg consensus at 2.53% YoY. This is the highest inflation since Apr-20 at 2.67% YoY and quite high as Indonesia only experienced a monthly inflation of more than 0.6% before the pandemic in May-19. We see this is just the beginning of inflation rate hike during the pandemic. There are three main factors that will lead the further hikes: (1) higher VAT rate at 11%, (2) higher fuel prices and (3) Islamic fasting month of Ramadan. Unfortunately, three of them start all together in Apr-22. 


Source of inflation

The highest growth and the biggest contributor, 57.6% of total inflation, was food, beverage and tobacco where it increased by 1.47% MoM (3.59% YoY). The main determinants of deflation in this basket were red chili contributing 0.10% to total inflation followed by cooking oil at 0.04%. Red chili was affected by the delayed harvest time due to the prolonged rainy season. For cooking oil, the problem underpins from the supply disruption in market.


More on cooking oil

In the span of less than 5 months, Ministry of Trade (MoT) has done policy flip-flop including cancelling the prohibition of bulk cooking oil, one-price policy, price ceiling (HET), domestic price obligation (DPO), domestic market obligation (DMO), BPDP-KS subsidy, raising export tax then lastly bringing back market mechanism. The moment HET was stopped, there was a sudden influx of cooking oil supply to market. According to Pusat Informasi Harga Pangan Strategis (PIHPS) Nasional, cooking oil price is getting stable now around Rp23,500 or jumped by 29.1% from Rp18,550 per liter in the beginning of Mar-22.


Eyeing on fuel price

In the second week of Mar-22, Pertamina raised fuel prices for the non-subsidized types: Pertamax Turbo, Pertamina Dex and Dexlite. Then, it increased Pertamax price in Apr 1st 2022. The non-subsidized fuel consumption is 17% of total fuel consumption where 14% is coming from Pertamax. Thus, the subsidized fuels such as Pertalite and Solar reach 83% of total fuel consumption. The higher price follows the global oil price hike during the current Russia-Ukraine conflict where Brent has climbed up by 36.6% YtD to USD107/barrel in the end of Mar-22. We see substitution effect may occur from the non-subsidized fuel consumption to the subsidized one as the price increase is sudden and considerably big enough around 38.9%. 


BI-7DRRR stays unchanged

We remain optimistic that the inflation in 2022 will stay manageable but we are reviewing our current estimate of inflation at 3.6% YoY in YE 2022 due to the adverse effect from the higher non-subsidized fuel price. Besides, the domestic consumption recovers faster than we predict due to many mobility restrictions have been eased. We expect inflation will reach 3% YoY next month for the first time since Nov-19, following the Ramadan month effect as well. Thus, we see BI will hold the rate at the current level on Apr, 18th – 19th 2022 to stay accommodative and to keep the market stays alluring.