Indonesia Macro Update - Inflation 03 Jul 2023

The reduction in prices of non-subsidized fuel ranging from 6.77% to 9.33% in early Jun '23 has driven deflation in the energy component by 0.59% MoM and deflation in the administered price components by 0.02% MoM, subsequently leading to a decrease in annual headline (or CPI) inflation. The inflation in Jun '23 reached 0.14% MoM or 3.52% YoY (Cons: 0.27% MoM or 3.62% YoY; KBVS: 0.42% MoM or 3.81% YoY; Prev: 0.09% MoM or 4.00% YoY). However, inflationnary risk is still apparent in the volatile price component, particularly driven by inflation in the Food group (e.g; a 0.06% MoM inflation in Chicken Meat, a 0.04% MoM inflation in Air Transport Tariffs, a 0.02% inflation in Chicken Eggs), and the Housing group (specifically a 0.01% MoM inflation in House Rentals). In the Wholesale Price Index's (WPI) side, the 3.89% MoM deflation in the commodity of Diesel has also contributed to a 0.41% MoM deflation in the Building/Construction Materials group. This, in turn, resulted in a deflation of 0.19% MoM in the Mining and Quarrying sector and a deflation of 0.01% MoM in the Manufacturing sector, subsequently contributing to the decrease in inflation in the WPI of Jun '23 to 3.87% YoY (prev: 4.43% YoY). On the other hand, the increase in prices in the Food group by 0.43% MoM in the CPI’s side and a 0.78% MoM increase in the Agricultural group in the PPI’s side had a positive impact on the 0.19% increase in Farmers' Income in the same month. This is mainly driven by a 2.22% MoM increase in the income of Horticulture Farmers (especially in Chili and Tomato commodities) and a 1.96% MoM increase in the income of Livestock Farmers (especially in Beef and Chicken Meat commodities). Furthermore, the decline in inflation has widened the 10Y SUN real yield to 281 bps (prev: 244 bps). Consequently, we believe the concern regarding capital outflow due to the narrowing interest rate differential between BI7DRRR and the Fed Rate, will ease as well as concerns over increasing CDS and Rupiah volatility. Moreover, the SBN market is still supported by a budget surplus of IDR204.3 tn or 0.97% of GDP until May '23, so we expect net foreign flows into the SBN market, which have reached ID80.43 tn (ytd, as of 26 Jun '23), to continue. In the meantime, the Nikkei Manufacturing PMI for Indonesia in Jun '23 has also increased to 52.5 (prev: 50.3), which is expected to attract foreign investors' appetite in the JCI, which has only reached IDR 14.25tn (ytd, as of 26 Jun '23). Therefore, we anticipate that these factors will provide more leeway for a faster reduction in BI7DRRR compared to other major global central banks, ceteris paribus. Fig 1. CPI (Consumer or Headline) Inflation

Unduh