Indonesian Inflation Running Ahead of Govt Forecasts, Analysts Say

Jakarta Globe, Dion Bisara & Ardian Wibisono, January 31, 2010

Officials handling stacks of rupiah notes in the money-storage room at Bank Indonesia in Jakarta. (EPA Photo/Jurnasyanto Sukarno)

Analysts have warned that inflation is running at a higher rate than government forecasts because of the impact of recent increases in food prices.

The government has predicted that annual inflation will remain below 3 percent in January despite rising prices for rice and sugar.

“The contribution [of rice prices] to our inflation is quite large. Other than that everything seems stable. I think January inflation will not exceed 3 percent annually,” Finance Minister Sri Mulyani Indrawati said last week.

Bank Indonesia also has predicted year-on-year inflation of below 3 percent in January, and month-on-month inflation of 0.5 percent to 0.6 percent.

However, many analysts believe the government is not giving sufficient weight to rising food prices or to the fact that inflation is likely to rise in light of the fact that it was unusually low last year, having hit a nine-year-low of 2.4 percent in November.

“The government conducted pre-election fuel price cuts in the same month [January] last year,” Helmi Arman and Anton Gunawan, economists at PT Bank Danamon, wrote in a report. “January month-on-month inflation will be close to 0.72 percent. The year-on-year figure will rise to 3.59 percent, from 2.78 percent in December.”

Helmi and Anton cited price increases for staples such as rice, sugar and cooking oil, which are heavily weighted in the consumer price index.

“For rice the factors are mostly seasonal — January is the start of the planting season — while sugar is much more a supply issue. As for cooking oil, prices probably rose following the lifting of tax subsidies that were put in place last year,” they wrote.

Winang Budoyo, chief economist at PT Bank CIMB Niaga, also pointed to rising food prices in predicting 3.5 percent annual inflation in January.

Eric Sugandi, an economist at Standard Chartered Bank, offered a forecast of 3.3 percent. “Nonetheless, we expect inflation to accelerate in a gradual manner in the first quarter and will return only to its normal range [4 percent to 6 percent, according to Bank Indonesia] by the end of 2010,” Eric said.

Purbaya Yudhi Sadewa, chief economist at the state-run Danareksa Research Institute, expects annual inflation to reach 3.9 percent in January but stressed the seasonal nature of the food price increases. “The rising price of rice is the main factor, boosting other food prices, especially sugar. Nevertheless, I expect this is just seasonal and with the harvest season to come in March, the inflationary pressure will diminish,” Purbaya said.

All the economists agreed that the central bank was unlikely to increase its benchmark interest rate at its policy meeting on Thursday.

“As inflation remains manageable in the first quarter of this year and as the current BI rate level is supportive of the rupiah, we expect BI to keep its benchmark rate unchanged at 6.5 percent in February 2010,” Eric said.

Helmi and Anton added: “We think the current BI rate of 6.50 percent still looks consistent with a rebound of inflation — meaning there will be little need for hiking rates this year.”

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. Indeed, 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.