Indonesia Inflation Hits Seven-Month High Due to Rising Food Prices

By webadmin on 09:27 pm Feb 01, 2010
Category Archive

Dion Bisara

Driven by rising prices for food and commodities, inflation accelerated
to its fastest pace in seven months in January, increasing the pressure
on the central bank to raise its key interest rate.

The
Central Statistics Agency (BPS) on Monday said the annual consumer
price index rose 3.72 percent in January from the same month a year
earlier, after posting a 2.78 percent increase in December.
Month-over-month inflation was 0.84 percent in January, up from 0.33
percent in December.

“These numbers basically tell us that
inflation is here again,” said Helmi Arman, an economist at PT Bank
Danamon. “However, we don’t think they represent cause for serious
concern yet. On a seasonally adjusted basis, 0.84 percent looks
moderate, considering that in the five years before 2009, January
inflation had been consistently above 1 percent.”

“Moreover,
most of the month’s inflation was contributed by only several highly
weighted commodities,” Helmi added. “Two commodities, rice and sugar,
together made up half of the 0.84 percent monthly inflation figure.
This is partly seasonal and partly a supply-side issue.”

Helmi has predicted inflation of 5.3 percent this year.

BPS chief Rusman Heriawan said that rising food prices, especially for rice, were behind the increase.

The
price of rice, a staple for most of the country’s 230 million people,
rose 2.6 percent in January from December, Bloomberg reported on
Monday, quoting data from PT Food Station Tjipinang Jaya, the country’s
biggest market for the grain.

The BPS does not reveal the
percentage weighting of rice in the consumer price index, but raw and
processed foods make up 36 percent of the weighting.

Finance
Minister Sri Mulyani Indrawati said the government was aware of the
risks posed by rising food prices but she expressed confidence that
inflation this year would come in “between 4 percent and 6 percent, or
a little bit over 5 percent, as BI [Bank Indonesia] has predicted.”

Analysts
said they expected Bank Indonesia to keep its benchmark interest rate
steady at 6.5 percent at its monthly policy meeting on Thursday. The
rate has remained unchanged since August, after a gradual reduction of
300 basis since December 2008.

“While we expect the BI rate to
remain on hold, the tone of the policy statement would probably not be
as dovish as last month,” Citigroup economist Johanna Chua said.

Johanna
said she expected inflation to pick up in the coming months and the
central bank to begin raising interest rates in the second half of the
year.

Johanna noted that other Asian central banks had taken a
more hawkish tone recently, with the People’s Bank of China hiking the
reserve-requirement ratio by 50 basis points and Bank Negara Malaysia
cautioning that there is a need for “rate normalization” to address
“financial imbalances.”

At its last meeting in early January, the central bank said it did not expect inflation to pick up in the first half of 2010.

In
fact, acting BI Governor Darmin Nasution floated the idea late last
year that the central bank could leave rates unchanged all year if
inflation stayed within its target range.