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Indonesian Inflation to Slow Amid Easing Food Costs
Dion Bisara & Grace Dwitiya Amianti | January 27, 2012

An Indonesian vendor holds chilis for sale at a traditional market in Jakarta. Indonesia’s inflation rate may slow to around 3.5 percent in January from a year earlier as the increase in food prices remains benign, according to the head of the central bank. (EPA Photo) An Indonesian vendor holds chilis for sale at a traditional market in Jakarta. Indonesia’s inflation rate may slow to around 3.5 percent in January from a year earlier as the increase in food prices remains benign, according to the head of the central bank. (EPA Photo)
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Indonesia’s inflation rate may slow to around 3.5 percent in January from a year earlier as the increase in food prices remains benign, according to the head of the central bank.

That would be the smallest gain in consumer prices since March 2010, when they increased 3.43 percent. Inflation rose 3.79 percent in December.

“The harvest season is coming. Food prices are rising, but just a little, not much,” Darmin Nasution, governor of Bank Indonesia, said in Jakarta on Friday. Darmin spoke to reporters after Friday prayers at the central bank’s compound.

Inflation will probably rise by 0.6 percent to 0.7 percent in January from the previous month, Darmin said. The Central Statistics Agency (BPS) will release consumer and trade data on Wednesday.

Easing inflation may not be enough for Bank Indonesia to make any changes in its monetary stance. The central bank, which cut its benchmark rate by 75 basis points between October and November last year, kept the rate at 6 percent in December and January. Its next meeting is on Feb. 9. Low borrowing costs have encouraged many Indonesian consumers to buy goods such as cars and houses.

The governor said that the weather in the current rainy season was not as bad as last year, and that helped to prevent food prices from rising significantly. Food costs accounted for 22 percent of the consumer price index for 2011.

In January last year, inflation hit 7.02 percent, a 32-month high, with rising prices of rice and chili peppers as the primary culprits because of severe weather that disrupted harvests and crop distribution.

Still, Darmin voiced his concerns over a possible acceleration in inflation in the coming months due to the government’s plan to restrict the use of subsidized fuel starting in April.

The government has said it plans to restrict the used of subsidized fuel in Java and Bali in April and is also considering the price of the subsidized fuels as part of its efforts to reduce the country’s budget deficit.

“If the fuel price increase is applied, it would depend on how much the price rises,” Darmin said. Fuel prices contributed 1.3 percent to main consumer price index last year.

Nevertheless, Darmin said inflation remained within Bank Indonesia’s target range this year — at 5.2 percent. It forecast inflation in a range of 3.5 percent to 5.5 percent this year.

Anton Gunawan, an economist at Bank Danamon Indonesia said that inflation in January could rise 3.66 percent from the previous year and 0.77 percent on a monthly basis. Core inflation — which measures price increases outside volatile food and fuel — may decline slightly to 4.16 percent from 4.34 percent in December due to a high base effect, he said.

“A continuing decline in the price of gold jewelry may have reduced the pressure on core inflation in the last two months,” Anton said.

Eric Alexander Sugandi, economist at Standard Chartered Bank Indonesia, expects inflation rate to be at 3.7 percent as he noted disruptions in food distribution across the country.

Additional reporting from Investor Daily