Tracking Global Inflation & its Causes
• Rising inflation is a phenomenon triggered by Covid-19 shock as supply and demand imbalance widen.
• Both emerging market economies and developed countries experience the same trend. The average inflation of several G20 countries gave us an evidence of rising inflationary pressure.
• The average inflation of EU in 2021 hit the 75th percentile of 5 years historical figures. This case is also found in France and Germany.
• U.S. average inflation this year reached 4.3% YoY and significantly higher than inflation level since Oct-16.
• The similar phenomenon was also observed in emerging economies. On average, Russia’s CPI rose by 6.34% YoY in 2021. That is higher than its upper quartile of inflation level during 2016-21.
• Brazil gives us another example where inflation started to nerve consumers. Last month, Brazil CPI increased 10.67% YoY.
• Soaring commodity price is one of inflation contributing factors. Combination of weather, labor shortage and other geopolitical related tension have caused production can not cope up with the demand side.
• Energy and food prices reached a multiyear highs and this trend is expected to stay in 2022.
Monetary Policy Normalization in Check
• U.S. rising inflation and improving job market is expected to drive the Fed more aggressive tightening agenda by speeding up tapering and increasing FFR by early on Jun-22.
• Elsewhere, a hawkish move has been taken by BoK and Norges Bank in Aug21 and Sep-21 respectively. Korean and Norway central bank became the first developed economies to increase their interest rate by 25 bps.
• In Nov-21 meeting, BoK even set the base rate at 1% or implying a 25 bps increase well aligned with market consensus.
• Some other emerging market country’s central banks set a more hawkish tone such as Russia, Brazil and Turkey as inflation and massive currency depreciation are haunting.
• Turkey’s Lira saw a massive depreciation against USD by more than 50% on an annual basis and becoming the worst performing emerging countries local currency due to central banks lack of independence and credibility.
• Even with the high inflation, BRCA kept the benchmark policy rate unchanged causing Argentina Peso to drop by 20% in value against USD.
• We already witnessed that rising inflation could have more damaging impact for emerging countries that structurally experience high inflation.
Indonesia : Are We Heading to a Higher Inflation?
• Indonesia’s inflation started to pick up in 3Q21. However, the inflationary pressures remain low and benign even below the lower target of central bank ITF.
• Throughout 2021, we observed that CPI across sectors to record a positive growth.
• We expect Indonesia FY21 inflation figure to remain below 2% as the lower band of Bank Indonesia (BI).
• Looking ahead, we see several factors that could drive higher inflation in 2022 including : 1) rising commodity prices and its ripple down effect; 2) higher VAT rate and possible 3) higher tobacco excise rate.
• We assume that inflation to stay manageable given the inflation expectation remain anchored within central bank’s target range of 2-4%.
• However with the increase in hawkish tone from global central bank and in order to maintain IDR stability we see that Bank Indonesia has room to increase benchmark policy rate by 50 bps next year.
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