Indonesia’s Inflation May Accelerate in 2013
Inflation accelerated last year, and the trend is likely to continue in 2013 on the back of higher wages and energy-related prices, according to three economists contacted by the Jakarta Globe.
Still, the gain in the consumer price index would not be enough to force Bank Indonesia, the central bank, to raise its benchmark interest rate, they said.
The consumer price index — a basket of goods and services prices used for measuring inflation — increased 4.3 percent last year, up from a 3.8 percent gain in 2011, the Central Statistics Agency said on Wednesday.
This year’s inflation will be driven by rising prices of raw food — such as rice, beef and fish — as well as higher housing rent, gold jewelry prices and transport costs.
“Inflation in Indonesia has stopped easing,” said Aninda Mitra, head of Southeast Asia economics at Australia and New Zealand Banking Group, in a report on Wednesday.
“[It] is likely to drift higher in coming months on account of unfavorable base effects as well as wage increases in the manufacturing sector and impending increases in government-controlled prices of electricity,” Mitra said.
The Jakarta administration plans to raise the monthly minimum wage by 44 percent to Rp 2.2 million ($228) this year. The move was soon followed by other regions, resulting in an average of 30 percent minimum wage rise nationally.
The government has decided to implement the 15 percent electricity tariff increase gradually this year, in increments of 4.3 percent per quarter starting this month.
Prakriti Sofat, economist at Barclays Capital in Singapore, also shared Mitra’s sentiment, adding that inflation pressures may build up, as producers pass costs resulting from a weak rupiah to consumers. The currency fell 6.6 percent against the dollar last year, according to Bank Indonesia data, in line with weak exports due to sluggish global demand, and soaring oil and capital goods import.
“We maintain our forecast that inflation will rise to 5.4 percent at end-2013, driven by strong growth, the impact of the average 30 percent hike in national minimum wages; and pass-through from rupiah weakness,” Sofat said.
The government expects inflation to be at 4.9 percent next year, according to its 2013 state budget. Bank Indonesia forecasts inflation this year at between 3.5 percent to 5.5 percent.
There are also possible inflationary pressures from higher fuel prices this year, as the 2013 state budget law gave discretionary power to government to raise the subsidized fuel price.
“But, it will be very challenging politically just one year ahead of elections,” Sofat said.
Higher inflation is unlikely to prompt Bank Indonesia to raise its benchmark rate, which has been at a record low of 5.75 percent since February.
Instead, the central bank might raise the deposit facility rate, known as Fasbi, some economists say.
The central bank last raised the Fasbi rate — an overnight deposit facility provided by Bank Indonesia for commercial banks to manage their liquidity — by 25 basis points to 4 percent in August.
Raising the Fasbi rate would reduce the amount of rupiah in circulation — because banks keep their money with the central bank rather than loan it out — and in turn helping to stabilize prices.