ECONOMIC UPDATE - Inflation eases to the lowest level since Oct-23

Transportation drives monthly deceleration

According to Statistics Indonesia (BPS), the monthly inflation rate decelerated to 0.04% MoM in Jan-24 (vs. 0.41% MoM in Dec-23), marking the slowest monthly inflation rate since Aug-23. Moreover, this figure fell below both our and consensus expectations off 0.25% MoM and 0.27 % MoM, respectively. The main factor driving this deceleration was the transportation basket, which contributed -0.11% to the overall inflation rate, with a -0.87% MoM disinflation rate. On the other hand, the food, beverage, and tobacco basket were major contributor to the monthly inflation rate hike, contributing 0.05 % MoM to the overall inflation rate, experiencing a 0.18 % MoM inflation rate. We attribute this deceleration primarily to the seasonal effect of Christmas celebrations and student holidays in Dec-23.  Additionally, the core inflation rate edged up to 0.20% MoM in Jan-24 (vs. 0.14% MoM in Dec-23), reaching the highest level since Apr-23. Furthermore, volatile food inflation eased to 0.01% MoM in Jan-24 (vs. 1.42% MoM in Dec-23), marking the lowest level since Aug-23. Meanwhile, administered prices recorded a disinflation to -0.48% MoM in Jan-24 (vs. 0.39% MoM in Dec-23), hitting the lowest level since Jan-24. Government has decreased non subsidized fuel price by  3%–7% in Jan-24. Looking ahead, we expect that the monthly inflation rate will ease to 0.02 % MoM in Feb-24, driven by harvest season. However, the government must anticipate the possibility of price spikes due to the Chinese New Year and the ongoing El Niño phenomenon.


Achieving target range amid base year adjustment

The annual inflation rate decelerated to 2.57% YoY in Jan-24 (vs. 2.61 % YoY in Dec-23, reaching 2024’s target range of 1.5%–3.5%, marking the slowest level since Oct-23. However, the inflation rate surpassed our estimation and consensus at 2.48% YoY and 2.53% YoY, respectively. The higher inflation rate compared to forecasts is due to the base year adjustment made by the BPS from the 2020 to 2022. Consequently, this adjustment has led to a decrease in the Consumer Price Index (CPI), with the January 2023 index falling from 113.98 to 102.55. Notably, the food, beverage, and tobacco basket exhibited the highest growth, contributing 1.63% YoY to the inflation rate with a 5.84% YoY increase. Additionally, core inflation decreased to 1.68% YoY (vs. 1.80% YoY in Dec-23), slightly below both our estimate and the consensus estimate of 1.71% YoY and 1.77% YoY, respectively. Looking ahead, we expect the yearly inflation rate to decelerate to 2.40% YoY in Jan-24, driven by historical seasonality data in harvest season. Meanwhile, we expect that annual inflation rate to be 3.01% YoY for FY24, driven by increased inflation expectations arising from worries about the rise in energy and food prices caused by geopolitical tensions.


Inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups rose in January, namely: food, beverages, and tobacco group of 5.84% YoY; clothing and footwear group of 1.02% YoY; housing, water, electricity, and household fuel group of 0.58% YoY; furnishings, household equipment, and routine household maintenance group of  1.20% YoY; health group of 1.88% YoY; transportation group of  1.11% YoY; recreation, sport, and culture group of  1.68% YoY; education group of  1.57% YoY ; food and beverage serving services/restaurant group of  2.37% YoY; and personal care and other services group of 3.01% YoY. Meanwhile, the information, communication, and financial services group edged down to -0.11% YoY.


BI’s governor remarks on global economy and FFR cuts

The Governor of Bank Indonesia (BI) opened the first post-policy meeting announcement of the year by remarking on the decelerating global economy and the expected FFR cuts in 2024. Furthermore, BI projects the global economy to grow by 3.0% YoY in 2023, then slow to 2.8% in 2024. Meanwhile, the cycle of interest rate hikes in advanced economies, including the Fed Funds Rate (FFR), is expected to have ended, although it remains high in the 1H24, with the possibility of starting to decline in the 2H24. Additionally, the central bank keeps its policy rate (BI Rate) unchanged at 6.00%, in line with consensus and consistent with its pro-stability messages. This decision reflects BI's commitment to keeping inflation within its targeted range of 2.5±%, which is lower than the previous year’s target at 3±1%. Moreover, we see the potential for rate cut in BI Rate by 50 bps in 2024 in line with the expectation of managed inflation and a relatively stable exchange rate. Currently, our forecast for inflation in 2024 is 3.0% YoY and the rupiah is Rp15,200/USD in YE24.