Indonesia: Inflation expected to pick up in 2021 – UOB

Economist at UOB Group Enrico Tanuwidjaja and Haris Handy assess the recent inflation figures in Indonesia and the prospects for the current year.

Key Quotes

“Indonesia’s annual inflation rate slowed for the first time in five months to +1.55% y/y in January 2021 from +1.68% in the previous month; as Indonesia continues to see a spike in COVID-19 cases, surpassing 1 million cases and entering the worst period after 330 days into the pandemic. The pandemic continues to ravage the purchasing power of consumers while demand has yet to recover. Core inflation, which excludes volatile and government-administered prices, slowed slightly to +1.56% y/y in January from +1.60% a month earlier. Moreover, volatile prices slowed by +2.82% y/y in January 2021 from December 2020’s +3.62%.”

“Out of 11 inflation baskets by expenditure, the setback of January 2021’s inflation was mainly attributable to slower food inflation of 2.81% y/y vs 3.63% in the previous month (given lower prices of eggs, shallot, and alcoholic beverages). Meanwhile, education and F&B accommodation managed to post higher inflation.”

“As Indonesia continues to see a spike in COVID-19 cases, the central government introduced the new measures in January (enforcement of public activity restrictions or “PPKM”) to restrict activities in hopes of slowing the COVID-19. This measure negatively affected inflation to some degree despite the curbs being less restrictive compared to the requirements under the largescale social restriction (“PSBB”) policy previously.”

“We expect the headline inflation to remain under control and gradually recover, and exceed the lower-end of the government's 2021 inflation target (2.0% - 4.0%) on the back of demand recovery (especially later on 2H21 given the optimism from the vaccine), accommodative monetary policy, and the continuation of fiscal stimulus disbursement. Nevertheless, downside risks remain due to uncertainty surrounding the pandemic going forward. which, in return, might hit back the consumers’ confidence.”