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Higher Oil Prices a Threat To Inflation Target: Indonesian Central Bank
Dion Bisara & Muhamad al Azhari | August 06, 2009

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The central bank said on Thursday that an expected surge in international oil prices next year might prompt the government to raise fuel prices, which would cause inflation to exceed its 2010 target of 5 percent.

“The disparity between prices of subsidized and non-subsidized fuel is increasing,” Rudy Hutabarat, who researches economic and monetary policy for Bank Indonesia.

“Usually, after presidential elections subsidized prices are raised. This could push inflation upward.”

The bank also forecast that an expected rise in the price of liquefied petroleum gas next year would also create inflationary pressures.

“LPG prices have to be increased 13 to 26 percent to match the market prices. This would add 0.28 to 0.55 percentage points to inflation,” Rudy said, adding that this calculation was based on growing use of LPG by consumers as a result of the government’s kerosene-conversion program.

State-owned PT Pertamina, the nation’s sole distributor of LPG, sells it for Rp 5,250 per kilogram for 12 kilogram containers, while the international market price is Rp 7,250 per kilogram.

Pertamina said on Thursday that it would have to ask the government to raise the price of LPG for 12 kilogram containers soon as international prices were on the rise, although it did not offer a specific date.

“The pressure on inflation in 2010 will increase. Extra effort will be needed to keep it at 5 percent,” Rudy said.

In the draft budget proposed to the House of Representatives on Monday, the government estimated that inflation next year would be 5 percent, equal to this year’s estimated rate.

However, on Thursday Rudy said inflation this year could actually be as low as 4 percent because the government expected food and fuel prices to remain relatively stable.

“Inflation is safe as long as there is no volatility in prices for key commodities, such as rice and fuel,” Rudy said.

The annual inflation rate eased to 2.71 percent in July, a nine-year low.

Sugiyono, a researcher from the Institute for Development of Economics and Finance, said that although global oil prices could surge at any time, he did not expect the government to increase fuel prices in the near future.

“The political risk is too great. Unless there is a sharp oil price increase, I think the government will maintain its current prices,” Sugiyono said.