Still Benign Inflationary Pressure
Our View on July-21 Inflation Data Release
We expect Jul-21 inflation rate to remain below central bank’s target at 0.03% MoM/1.47% YoY. Rationale for low inflation in Jul-21 are : 1) limited public mobility during the implementation of PPKM Darurat; 2) low inflation expectation and 3) increase in some of food staples were offset by others. Food staples to remain the major contributor for inflation hikes for Jul-21 period. On a monthly basis, some food crops that experienced an increase in price were : beef (+1.54%); eggs (+1.36%); onions (+12.04%); garlic (+2.69%); red chili pepper (+6.89%). Rice, sugar and cooking oil price were stable meanwhile chicken meat price (-10.82%) and cayenne pepper (- 5.99%). During PPKM Darurat, public mobility dropped nearly 32%. Therefore we believe inflationary pressure from transportation sectors would be limited. Instead of rising, this sector would likely to experience a deflation.
Benign Inflation in 2021
Deflation occurred in June-21 (-0.16% MoM/+1.33% YoY). Average headline inflation for 1H21 was 1.45% and average core inflation was 1.39% during the same period. This is the lowest level in the last 5 years. Although broad money supply rose 11.4% YoY in June-21, low inflation was driven by drop in money velocity. During the implementation of social restriction people tend to cut their spending and prefer saving. This is in line with increasing banking third party fund that was dominated by saving and time deposits. Loan disbursement also decelerated and even experiencing a contraction since Sep-20. This is also in line with limited demand for consumption and corporate needs to finance its working capital and investment. Although credit grew 0.6% YoY last month, we expect loan disbursement growth will remain limited ahead. BI expect credit growth to 4-6% this year. Overall liquidity in the economy is considered ample, yet money velocity drop.
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