Inflation increases, but still within market expectations
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Consumer prices accelerated in July on the back of surging food prices amid higher consumption at the beginning of Ramadhan, but levels still fulfilled market expectations.
Indonesia’s inflation rate rose to 4.56 percent year-on-year last month after surging to 4.53 percent in June, the Central Statistics Agency (BPS) announced on Wednesday.
The higher headline inflation can be attributed to the rise of the monthly consumer price index (CPI), which increased to 0.70 percent in July, up from 0.62 percent recorded a month earlier.
July’s inflation was largely driven by the price hike of food items, particularly broiler chicken, eggs, rice and sugar, as well as processed food, drinks, cigarettes and tobacco, which respectively contributed 0.39 percent and 0.16 percent to overall inflation. Other components, such as educational costs, added 0.03 percent to the rate.
BPS chief Suryamin described the inflation levels as “normal”, as the rise was driven by seasonal factors, including the start of the fasting month, school holidays and the new academic year.
“Nothing pushed up the prices of any commodities too highly; this is still normal compared to the same month in previous years,” he said, comparing the inflation in July with 1.67 percent in the same month in 2010 and 0.7 percent in 2011.
Despite the manageable inflation, however, Suryamin warned that inflation might climb further with Idul Fitri later this month possibly driving consumer prices higher, as demands for clothing and jewelry in addition to food would likely surge.
However, Prakiti Sofat, a Singapore-based analyst at Barclays Research, said in a statement that headline inflation would likely ease in August as a gold-boosted high base would more than offset the continuing pressure from food triggered by Ramadhan, Idul Fitri and educational costs.
Analysts have said that as inflation remained in line with the official target, Bank Indonesia (BI) would maintain its benchmark rate at 5.75 percent.
The central bank is expecting the rate of inflation to range between 3.5 percent and 5.5 percent this year.
Anton Hendranata, an economist at Bank Danamon, said the central bank would likely hold its interest rates steady until the end of the year, as the CPI could decline in the months following Idul Fitri.
“We don’t see any urgency that would prompt BI to raise its interest rate. As yet, there’s no worry about overheating” he told The Jakarta Post.
Sofat of Barclays shared a similar view, saying that BI would likely keep interest rates at the current level to help manage liquidity.
“Our basic case is for the central bank to keep the policy rate unchanged at 5.75 percent through to year end with its focus remaining on liquidity management,” said Sofat, but added that BI could cut its rate in the event of a worsening external outlook, including a major shock from Europe, stagnating growth in China or a further drop in commodity prices.
BI officials are due to hold a meeting later next week to decide on the course of the country’s monetary policy. Analysts have estimated it will likely stick to its benchmark rate of 5.75 percent, which is a record low, as consumer prices are still within target.