Indonesia inflation drops faster than expected to below 3 percent

Jakarta, Indonesianpost.com – Indonesia saw inflation drop in September to below 3 percent, falling faster than analysts expected.

During a press briefing on Monday, Statistics Indonesia (BPS) showed that headline inflation, or the consumer price index (CPI), grew by 2.28 percent year-on-year (yoy) in September, much lower than the previous month’s 3.27 percent yoy.

The number is far lower than projected by Moody’s Analytics and several other analysts at 2.7 percent. It is also moving closer to the lower bound of Bank Indonesia’s target of between 2 and 4 percent.

Acting BPS head Amalia Adininggar Widyasanti said in the briefing that the food, beverages, and tobacco spending group contributed the most to the national inflation and it experienced the highest growth rate of 4.17 percent yoy.

Rice was the commodity with the largest annual inflation contribution in September with a 0.55 percent share, followed by filter clove cigarettes at 0.19 percent and onions at 0.08 percent.

“Rice inflation on a year-on-year basis is currently at its highest. This is not only because of domestic conditions but also disruptions in rice production in the international market,” she said.

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Amalia said production in the world’s rice exporters, such as India, Thailand, and Vietnam was seeing a decline due to the El Niño phenomenon and drier weather pattern. Similar challenges were also experienced in many rice-producing regions in Indonesia.

Spending on transportation saw a modest 0.99 percent yoy growth in September along with a much smaller contribution at 0.13 percent compared with the previous months. BPS said this was due to the high base effect of the subsidized fuel price hike in 2022.

Cars and train travel contributed the most to annual inflation in transportation spending, respectively, while airfares experienced deflation in September.

“The September 2022 increase in fuel prices resulted in a higher CPI level than the previous year. The increases in fuel prices in September 2022 contributed to inflation only until August 2023,” Amalia said.

In September this year, the government approved higher non-subsidized fuel prices. Amalia said gasoline contributed 0.06 percent to monthly national inflation.

Bank Indonesia (BI) has decided to keep its inflation forecast for this year unchanged despite the recent surge in oil prices and soaring prices of rice in both the global and domestic markets.

It estimates that the rate will be 3 percent, falling directly in the center of its inflation target range, at the end of this year, and that it will drop slightly to 2.8 percent next year.

Irman Faiz, economist at Bank Danamon, said in a statement on Monday that he expected headline inflation would hover higher in December at 2.7 percent yoy, as he saw the faster-than-expected decline to be temporary.

The decline in September’s inflation was primarily related to the transportation spending component, he said. Like Amalia, he said this was due to the base effect of last year’s subsidized gasoline price hike.

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Iman also stated that the residual base effect from last year’s subsidized gasoline price hike would continue, while the influence of El Niño on domestic variable food prices had remained low.

“We expect a slight uptick in inflation to 2.9 percent in 2024. It would remain within BI’s next year target range of 1.5-3.5 percent driven by expectations of lower global commodity prices and subdued input cost inflation,” Irman said.

Josua Pardede, chief economist at Bank Permata, added that rice would almost certainly cause inflation to surge again in the future, as it follows international rice prices that are affected by the impact of El Niño.

“Food inflation prices could rise again, especially in the first semester of next year, because El Niño had been expected to end by the end of this year, but is likely to last longer,” Josua told The Jakarta Post on Monday.

Josua said he also expects that a sugar-sweetened beverages tax may likely be introduced in the second half of next year, potentially driving up inflation in 2024.