In an ideal economy, inflation rate is small and manageable. The price level of goods and services increases and consumers spend. Hence business revenue, investment, and wages rise.

The opposite of inflation is deflation. From the consumers’ perspective, falling prices seem to be a good thing as the value of our money increases. However, deflation is a bad thing for the economy as it is often linked to falling purchasing power.

Knowing that prices will continue to fall in the future, consumers delay consumption for later when prices finally do fall. Deflation rewards people who delay consumption, but on the other side, punishes business activities. From a macro perspective, business revenue falls, ultimately leading to lay-offs and pay cuts, which further worsening deflation.

Deflation in Indonesia

For five months in a row, Indonesia experienced deflation (stopped in October 2024); caused by falling production costs and purchasing power, especially those in the middle class.

As an effort to stimulate the economy, Bank Indonesia started cutting interest rates by 25 bps from 6.25% to 6% in September. Bank Indonesia is expected to continue its rate cuts throughout 2025.

This falling interest rate environment leads some to start speculating on riskier assets. As wise investors, what should we do in this environment?

It cannot be denied that macro is important. Macroeconomics has an important role in how businesses will perform in the future. In general, during good macroeconomic conditions, businesses perform well and vice versa.

Numerous investors pay attention to macro and use them as a basis for investment decisions. It has been a common practice in the finance industry around the world.

Why we shouldn't focus on macroeconomics

The problem is that macroeconomics is unknowable and unpredictable. Even the “smartest” analysts and economists often incorrectly predict macroeconomics. Economics is not an exact science in a laboratory where certain variables can be adjusted and results are fixed.

Economics is a social science where factors such as human emotion, motivation, irrationality, and politics play roles. Even if we manage to correctly predict certain macroeconomic indicators, the results might vary due to other factors that might not go as planned. 

Every year, Indonesia’s Ministry of Finance releases its macroeconomic assumptions for the following year. These macroeconomic assumptions include GDP growth, inflation, exchange rate, and fiscal deficit. Despite having the best resources to predict macro, the predictions are rarely exactly right.

As a wise investor, we should admit that we cannot predict macro. Predicting macro is time and resource-consuming, but it yields very little reward.

Not predicting macro data does not necessarily mean closing our eyes and not keeping updated. Instead, it means that we should select which data is important and which is not; which data affects the business and which does not.

The important and impactful data is called a key variable. We should actively monitor the key variables, especially the ones that directly affect the stocks we own. For coal mines, the key variables include coal prices, production volume, and cash costs. For banks, the key variables include CASA, COF, LDR, GIM, NIM, NPL, and credit cost, among other things.

For instance, when coal prices are high we can monitor the key variables to estimate the average selling price (ASP) and bottom line. We can do the same when prices are low. These educated guesses are important to know and should be made instead of merely predicting whether interest rates will rise or fall.

Rather than predicting macro, it is better to actively monitor the key variables. Paying attention to key variables gives more useful insights than correctly predicting macro.

Since it is very difficult to predict macro, it is best for us to stay invested and buy wonderful businesses at discounted prices. These companies that have moats will continue to excel regardless. Even when interest rates are high, wonderful companies will still be able to perform well.

Some firms, especially those with strong pricing power, can in fact benefit from bad times. These businesses can raise prices and utilize inflation.

Take ICBP for example. 2022 was a bad year for instant noodle producers as wheat prices skyrocketed by several folds, reaching almost $12 per bushel due to the Russian invasion of Ukraine. During that time, the global economy, including that of Indonesia, was also experiencing record-high inflation.

As a company with strong pricing power, ICBP utilized the poor condition to raise prices and pass on rising costs to consumers. After the price increase, Indomie Goreng is now sold at Rp3,100. Despite the somewhat noticeable price hike, though, volumes were not hit, resulting in a 14% increase in revenue.

“Heads I win, tails I don’t lose much” – Mohnish Pabrai

Again, instead of wasting time and resources to predict something that is unpredictable, we should allocate our time wisely and find wonderful companies with pricing power. In good times, these companies will excel. However, even in bad times, these companies can still raise prices without volumes being hit. 

“Predicting rain doesn’t count. Building arks does” – Warren Buffett –