Inflation rises on higher basic food prices, but stays in check

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Consumer prices accelerated in June on an annual basis as supply constraints spiked prices of food commodities such as red chili and garlic ahead of festivities Ramadhan fasting month.

Indonesia’s inflation rate climbed 4.53 percent last month from a year ago after rising 4.45 percent in May, the Central Statistics Agency (BPS) announced on Monday.

“The headline inflation rate in June was higher than our expectations and the consensus forecast,” Bank Danamon economists Anton Hendranata and Dian Ayu Yustina said in a research note distributed after the announcement.

Consumer prices, however, remained well within the central bank’s inflation target of between 3.5 percent and 5.5 percent this year.

Bank Indonesia (BI) Governor Darmin Nasution said despite having kept the nation’s inflation in check, the central bank remained on “alert” as the upcoming festive season may bring consumer prices further up.

“We are entering the fasting season and the beginning of the academic year. So, we need to stay alert,” he added, citing low year-to-date inflation rate of 1.79 percent.

Darmin declined to reveal the monetary strategies that the central bank might implement to mitigate the potential rise of inflation within the coming months.

BI’s board of governors will meet on July 12 to decide on the direction of Indonesia’s monetary stance, but analysts predicted that the benchmark interest rate would be kept on hold because consumer prices remained well within target.

The central bank has kept the so-called BI rate at a record low of 5.75 percent to provide low borrowing costs for people to consume more and for business to expand, which in turn would spur domestic economic growth against the backdrop of weakening global economy on eurozone debt crisis.

Prakiti Sofat, a Singapore-based analyst at Barclays Research, said food prices would continue rising in July due to strong demand during Ramadhan, and that could eventually lead to an increase in core inflation.

Core inflation, which excludes volatile food and govermnent-adjusted prices, remained stable at 4.15 percent in June from a year earlier, BPS data shows.

Prices of recreation and transportation, particularly air transport, rose moderately due to the school holiday season, economists said. The price of gold jewelry also increased moderately in line with the global gold price and the weakness of the rupiah.

“[In June,] higher food price inflation was offset by smaller increases in services — health, education, recreation, etc., Sofat said in a statement.

Basic food inflated 0.39 percent in June on a monthly basis, over increasing prices of red chili, garlic, broiler and fish. Overall, monthly inflation in June stood at 0.62 percent.

“Meanwhile, the price of rice only increased by 0.01 percent. This is supported by year-to-date rice production from January to April that grew by 4.31 percent year-on-year, with the increasing harvesting area and productivity,” Anton and Dian of Bank Danamon said in the note.

Indonesia’s rice output may climb 4.3 percent to 68.6 million metric tons this year, BPS data shows, as dry season helps farmers to boost planting of higher-yield crops.

The area sown to rice may gain 1.8 percent to 13.4 million hectares and yields may increase 2.5 percent to 5.1 tons per hectare, according to BPS chairman Suryamin. (tas)