Indonesia’s inflation falls to 20-year low as consumer spending weakens

Adrian Wail Akhlas

The Jakarta Post

Jakarta

Jakarta   /  Wed, July 1, 2020  /  04:36 pm

Dozens of Riders of ride-hailing companies wait in line for their turn to get lunch boxes provided by an NGO on Jl. Raya Bambu Apus in East Jakarta on April 03. Indonesia has seen transportation prices rise relatively fast over the past year as overall inflation dropped to a 20-year low.(JP/P.J.Leo)

Indonesia recorded the lowest annual inflation rate since 2000 in June, slightly below the central bank’s target range, as the coronavirus pandemic upends business activity and demand for goods and services.

Statistics Indonesia’s (BPS) consumer price index (CPI) was up 1.96 percent year-on-year (yoy) in June, a 20-year low and below Bank Indonesia’s (BI) target range of between 2 and 4 percent for the year. BPS head Suhariyanto told reporters last month that this year’s low inflation was due to weaker purchasing power as the pandemic reined in consumer demand.

“The inflation pattern is different this year, as we usually record an inflation peak in the month of Ramadan and for the Idul Fitri holiday. This did not happen due to the COVID-19 pandemic,” BPS head Suhariyanto told reporters on Wednesday.

While core inflation reached 2.26 percent yoy, government-administered prices were up only 0.52 percent, but volatile food prices were 2.32 percent higher than a year ago. Consumer prices for health, education as well as food, beverages and tobacco rose the most, at 4.16 percent, 3.66 percent and 3.03 percent, respectively. Those for transportation as well as information, communication and financial services dropped the most, deflating by 0.95 percent and 0.3 percent, respectively.

The relatively high increase in the prices of food, beverages and tobacco seen in June was driven by increased prices of purebred chicken and eggs due to low stocks in several regions, Suhariyanto went on to say.

“We also recorded inflation in transportation due to rising prices of airline tickets and online motorcycle taxis,” referring to services provided by ride-hailing apps Gojek and Grab. Fitch Solutions recently predicted that the technology firms would scale back on discounts.

“We expect Grab and Gojek to scale back on discounts to become profitable, especially so as investor funding could potentially slow amidst weaker global economic activity,” analysts of Fitch Solutions wrote in a recent research note.

The government has begun to reopen the economy in June after three months of large-scale social restrictions (PSBB) in a bid to prevent further job losses and boost purchasing power. The so-called new normal protocols allow people to resume business activity and travel using planes and trains, among other means, albeit at 50 percent of the normal capacity.

More than 3.06 million Indonesians have either been laid-off or furloughed as of May 27, according to Manpower Ministry data. The government expects up to 5.5 million of the country’s workforce, dominated by those working in the informal sector, to lose their jobs this year following slowing economic activity.

“We believe that weaker domestic demand due to the COVID-19 outbreak as well as lower global oil prices will keep price pressures in Indonesia contained for the forthcoming months,” said Fitch Solutions, expecting inflation to reach 2.6 percent for the full year.

Meanwhile, Bank Permata economist Josua Pardede said that, despite the government’s decision to reopen the economy in June, economic activity and consumers behavior had yet to return to prepandemic levels.

“Consumers are still reluctant to purchase secondary and tertiary goods, as they only want to [cover] basic needs,” Josua told The Jakarta Post over the phone. “This defensive trend could continue into the third quarter if the government is unable to boost purchasing power.”

Josua added that the government must speed up its stimulus spending in a bid to bolster the economy, adding that inflation may average between 2 to 2.5 percent this year to reflect weak consumer spending.

Bank Mandiri economist Andry Asmoro, meanwhile, estimated that inflation will end the year within BI’s target range at 2.69 percent. 

“The higher forecast compared to the 2019 realization of 2.59 percent is because of the increasing gold price due to higher uncertainty in the global financial market, the impact of increasing money supply through economic stimulus spending and higher prices of imported goods,” said Andry.