In September 2024, Indonesia's CPI recorded deflation, marking the worst figure since 1999. This deflation, which has occurred for five consecutive months, coincides with the final months of President Joko Widodo's administration. According to the Central Statistics Agency (BPS), Indonesia experienced a monthly deflation of 0.12% in September 2024, deeper than the 0.03% recorded in August 2024. The country has seen deflation since May 2024, indicating a prolonged downward pressure on prices.
On an annual basis, inflation rose by 1.84%, which is lower than the previous year's figure of 2.12%. The Acting Head of BPS, Amalia Adininggar Widyasanti, pointed out that consecutive deflation within a calendar year is not unprecedented in Indonesia, as it last occurred during the 1998-1999 Asian financial crisis. Food, beverages, and tobacco contributed most significantly to the deflation, with prices in these categories falling 0.59%, driven largely by declines in key commodities like red chilies, eggs, and meat.
While falling food prices have played a role in reducing inflation, there are concerns that declining consumer purchasing power may also be contributing to the sustained deflation. Historically, Indonesia's CPI is influenced by supply factors, with inflation typically spiking during supply disruptions and normalizing when supply improves. However, the ongoing deflation in 2024, despite adequate supplies of essential goods, suggests a weakening in demand, as evidenced by declining spending in sectors such as restaurants, household goods, and fashion.
Several economists has warned that the pressure on both demand and supply, reflected in the deflation and the contraction of the manufacturing sector's PMI, could hinder Indonesia's ability to achieve economic growth above 5%. The PMI has been in contraction for three consecutive months, indicating a decline in manufacturing activity, as producers scale back purchases and reduce inventories in response to weak demand and market uncertainty.
Indonesia PMI Manufacturing
Eventhough the decline of inflation rate was partly contributed by moderating global commodities' prices (compared to 2023's prices), we believe declining purchasing power also plays an important role. However, the uptrend of core inflation indicates that the inflation rate might not fall deeper and go below BI's target range.
Bloomberg Commodity Index
Based on the latest inflation data, we are expecting more aggressive rate-cuts by Bank Indonesia to keep the economic growth's momentum and avoid deeper slowdown. Therefore it would be wise to stick with stocks which is sensitive to interest rates such as JSMR, TOWR and property stocks. We believe the decline in interest burden is likely to boost company's earnings as interest rates are being cut aggresively.
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