ECONOMIC UPDATE - Inflation - Monthly deflation ends as gold prices rise

Gold jewelry prices drive monthly inflation rate

According to Statistics Indonesia (BPS), a monthly inflation increase of +0.08% MoM In Oct-24, breaking the deflationary trend since May. This rate surpassed both our projection of +0.05% MoM and the consensus forecast of +0.03% MoM. The primary driver was a +0.06% MoM rise in gold jewelry prices, which led to a +0.94% MoM inflation rate in the personal care and other services category, contributing 0.06% to the overall headline inflation. On the other hand, transportation prices dropped by -0.52% MoM, contributing -0.06% to the overall inflation rate, mainly due to lower non-subsidized fuel prices. Furthermore, volatile food prices continued their deflationary trend for the seventh consecutive month, declining by -0.11% MoM in October. Administered prices also saw a deflation of -0.25% MoM, reaching their lowest level since January. However, core inflation rose to 0.22% MoM, the highest since April. Looking forward, we anticipate the inflationary trend to continue this month, largely due to a potential rise in rice prices. The National Food Agency (Bapanas) forecasts a rice stock deficit of -0.86 mn tons due to lower production and higher demand. Additionally, the upcoming local elections (Pilkada) are expected to drive inflation higher. Additionally, Pertamina has raised non-subsidized fuel prices, excluding Pertamax, in response to higher crude oil prices. Average WTI crude oil price rose by +3.15% MoM to USD71.6/bbl in October, spurred by ongoing geopolitical tensions in the Middle East.

 

Yearly inflation rate falls to lowest level since Oct-21

The annual inflation rate eased to 1.71% YoY in Oct-24, continuing its downward trend since March and reaching the lowest level since Oct-21. This result closely aligns with our estimate of 1.69% YoY and the consensus forecast of 1.66% YoY. The largest contributor to inflation was the food, beverages, and tobacco category, contributing 0.67% YoY to headline inflation rate, with price growth in this basket slowing to 2.35% YoY from 2.57% YoY in the previous month. Volatile food inflation also declined to 0.89% YoY in October from 1.43% YoY in September, mainly due to a deceleration in foodstuff prices to 1.15% YoY from 1.53% YoY. Administered prices similarly slowed to 0.77% YoY in October, down from 1.40% YoY in September. However, core inflation edged up slightly to 2.21% YoY, compared to 2.09% YoY in the previous month, exceeding both our estimate and the consensus forecast of 2.10% YoY and 2.09% YoY, respectively. Despite this continued decline in annual inflation, we anticipate a potential rise in inflation for the remainder of the year. Contributing factors include local elections, a decrease in rice stocks amid high demand, oil price volatility, a potential BI rate cut, student holidays, and the Christmas season. However, a stronger Rupiah could help offset some of the imported inflation. Taking these factors into account, we forecast year-end inflation at 1.9% YoY.

 

Rupiah weakens on stronger dollar and global uncertainty

The Rupiah depreciated by 3.69% MoM to Rp15,698/USD, primarily driven by global factors, especially from the US. The Dollar Index (DXY) rose from 100.77 in September to 103.41 in October due to lower expectations for an aggressive FFR cut in November, escalating geopolitical tensions in the Middle East and Russia vs Ukraine, and heightened US political uncertainty, with markets pricing in a possible Donald Trump victory. According to the CME FedWatch Tool, investor expectations for a 50 bps rate cut dropped from 58% in September to 0% in October, This shift was influenced by recent updates on U.S. unemployment and inflation. The latest data show U.S. unemployment at 4.1%(vs. 4.2% consensus), and inflation at 2.4% YoY,(vs. 2.3% consensus). Looking ahead, we anticipate easing global pressures following the expected FFR cut. We project that the Fed will lower its benchmark rate by 25 bps in both November and December to support economic growth and reduce unemployment, bringing the rate down to 4.5%. Meanwhile, BI is expected to cut its rate by only 25 bps to 5.75% in December, anticipating global uncertainties. Taking all these factors into account, we forecast rupiah to be Rp15,250/USD for YE24 and Rp15,750/USD for average year.