September 2020 Inflation Outlook: Volatile Foods Held Down Inflation






  • The realization of the government’s social protection program has not yet been able to significantly raise household consumption. Retail spending was  weak and still contracting, while prices of basic goods continued to decline. In addition, growth in the money supply continued to weaken due to lower interest rates.
  • The realization of the social protection program continued to accelerate. As of September 16, 2020, the realization of the social protection program had reached Rp134.45T, up by Rp21.51T compared to the previous month. In addition, the government added Rp38.11T to the budget, highlighting the importance of the social protection program as it has a direct impact on reducing the burden of household expenses.
  • Public consumption has not reached the pre-pandemic level. Retail sales in August 2020 contracted by -10.13% yoy, slightly better performance than in the previous month when retail sales contracted by -12.28% yoy. The decline in retail spending was mainly on clothing and cultural & recreation goods which posted declines of -63.78% yoy and -35.55% yoy respectively.
  • Basic food prices continued to decline. Significant declines were seen in the prices of Cayenne Peppers, Red Chillies, Eggs, and Chicken by -6.01% mom, -5.92% mom, -5.22% mom, and -4.25% mom, respectively. Meanwhile, the price of garlic increased sharply by 18.60% mom due to the decline in imports of garlic. Meanwhile, the price of cooking oil increased by 1.37% mom in line with the increase in CPO prices.
  • The domestic financial market weakened amid weak household expenditure due to several factors such as the increasing number of new cases of Covid-19 and the reimposition of large scale social distancing measures. The USD/IDR exchange rate rose compared to the previous month. In September 2020 the average USD/IDR exchange rate stood at IDR 14,889/USD or up by 1.38% mom. 
  • Given this backdrop, we estimate that inflation will reach -0.01% (mom) or 1.42% (yoy) in September 2020. This estimate is lower than the general inflation target of 2% – 4% yoy. The low inflation mainly reflects declines in volatile foods and administered prices which contracted by -0.66% mom and -0.02% mom respectively, while core inflation grew by 0.30% mom.
  • We believe that Bank Indonesia is unlikely to cut or increase the BI 7 Days Repo Rate, for several reasons:
    • The domestic economy continues to improve at a slow pace. 
    • The exchange rate remains under control with a market mechanism that is running well, although it weakened slightly in September 2020.
    • Credit growth remained weak and slowed down to 1.04% yoy in August 2020, lower than the previous month’s figure of 1.53% yoy.

For more information, please contact cs@danareksa.co.id 

Source: Danareksa Research Institute

Photo by David Izquierdo on Unsplash