August 2, 2023
JAKARTA – Indonesia saw inflation continue to drop in July, moving even closer to dropping below 3 percent, the lower bound of the central bank’s target.
The country’s annual consumer price index (CPI) growth slowed to its six-month low of 3.08 percent, according to Statistics Indonesia (BPS). That figure was much lower than Moody’s Analytics prediction of 3.3 percent.
“Annual inflation has consistently dropped since March 2023,” Pudji Ismartini, BPS’ undersecretary for services and distribution statistics, said in a press briefing on Tuesday.
The recent figure drops from June’s 3.52 percent, which marked the first time inflation had dipped below 4 percent since May 2022.
Bank Indonesia (BI) has set this year’s inflation target at 3 plus-minus 1 percent, with the country’s July inflation inching toward the lowest range. Next year, BI projects inflation could be much lower at 2.5 plus-minus 1 percent range.
Transportation remained the biggest inflation contributor last month, as prices in this expenditure group were up 9.58 percent year-on-year (yoy).
Meanwhile, gasoline, rice and cigarettes were among the commodities that contributed the most to the annual inflation figure.
On a monthly basis, the CPI rose by 0.21 percent in July, with transportation also contributing the most to inflation, followed by food and tobacco.
As it continues to moderate faster than market expectations, many believe that the headline inflation figure will drop below 3 percent soon.
Read also: BI keeps key rate unchanged, cuts QRIS fees
Publicly listed lender Bank Danamon economist Irman Faiz said in a statement on Tuesday that is likely to occur in the fourth quarter of this year.
“[The drop is] driven by the high base effect from last year’s subsidized fuel price adjustment,” said Irman in a press statement released on Tuesday.
“However, it is important to note the potential risks arising from factors such as the El Niño [weather system], global commodity export policies and election activities,” he added.
Irman expected inflation to stay within BI’s target range throughout the year, which provides room for the central bank to maintain rupiah stability.
In late July, BI kept its benchmark seven-day reverse repo rate at 5.75 percent, the level reached in January after being raised by a cumulative 225 basis points beginning in August last year.
Although Indonesian inflation has been in a downward trend for some time, economists assess that a rate cut is not likely any time soon given that pressures still persist, especially from abroad, as many major central banks are expected to keep increasing rates to fight inflation in their respective countries.
State-owned lender Mandiri economist Faisal Rachman said in a statement on Tuesday that the recent figure would allow BI to hold back from raising its benchmark interest rate despite facing the hawkish stance maintained by global major central banks.
He also shared his belief that BI would maintain its rate throughout the remainder of this year at 5.75 percent.