The sharp increase in the inflation rate in July will not only put the central bank under pressure to increase its benchmark rate, but will also jeopardize government efforts to keep inflation within its target range, analysts say.
The Central Statistics Agency (BPS) reported Monday that the monthly inflation rate climbed by 1.57 percent in July, the highest level in 15 months. With the surge, the country’s year-on-year consumer price index (CPI) rose to 6.22 percent in July. The year-to-date inflation rate also rose to 4.02 percent, slightly lower than the 5.3 percent targeted by the government for the whole year.
BPS head Rusman Heriawan attributed the higher inflation rate in July to the increased price of several commodities and vehicle taxes. “We have to acknowledge that it’s the highest increase this year,” he said.
He added that rice and vehicle taxes were the two biggest contributors to the July inflation, which was higher than in previous months.
“Rice contributed 0.26 percent to July’s total inflation, while vehicle taxes contributed 0.21 percent,” he said, adding that the increase in taxes of 50 percent for four-wheeled vehicles and 100 percent for two-wheeled, three-wheeled and public transportation vehicles had made the vehicle tax payment one of major contributors to July inflation.
Standard Chartered economist Fauzi Ikhsan said that with the sharp increase in July inflation, the government would likely face difficulties to cap this year’s inflation rate under its target rate of 5.3 percent.
“We are worried that the annual inflation rate will exceed 6 percent due to the fact it has already exceeded 4 percent in the first sevens months,” he told The Jakarta Post.
However, he said Bank Indonesia would continue to maintain its benchmark rate at the current level despite July’s higher inflation rate.
Bank Indonesia, which releases its monthly policy decision this week, has chosen to support economic growth rather than inflationary pressures, other analysts say.
They also say they believed the central bank would continue to keep its benchmark rate at 6.5 percent although other Asian central banks have started to raise borrowing costs.
Meanwhile, the rupiah advanced for an eight consecutive day, its longest winning streak since December 2006, despite the BPS report on higher inflation.
The currency touched the strongest level in more than three years after overseas investors last month pumped US$541 million into the nation’s equities, the most since April 2007.
“The funds inflow is a promising sign and an indication that Indonesia’s economic fundamentals are strong,” said Enrico Tanuwidjaja, a regional economist at OSK-DMG Group in Singapore. “This is long-term money we are talking about,” he told Bloomberg.
The rupiah rose 0.1 percent to 8,943 per dollar as of 4:28 p.m. in Jakarta. The currency reached 8,920, the strongest level since June 2007.
