TheJakartaPost

Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

Govt, BI vigilant on upside inflation risk

People’s purchasing power may weaken in the near term in the wake of bad weather that could disrupt food supplies, the fiscal and monetary authorities have cautioned

Satria Sambijantoro (The Jakarta Post)
Jakarta
Sat, January 18, 2014

Share This Article

Change Size

Govt, BI vigilant on upside inflation risk

People'€™s purchasing power may weaken in the near term in the wake of bad weather that could disrupt food supplies, the fiscal and monetary authorities have cautioned.

Finance Minister Chatib Basri said the government would remain watchful over supply-side inflation, which includes price levels for volatile food and government-controlled prices, which might see upside risks from bad weather.

'€œPotential flooding [stemming from bad weather] could affect inflation, though we still have to wait a little longer to gauge its impact,'€ Chatib told reporters after Friday prayers at his Jakarta office.

Inflation normally edges higher in January as some businesses adjust their costs after the turn of the year. It is also the peak of the wet season, with heavy rain materializing throughout the archipelago, ultimately leading to failed harvests that disrupt the supplies of certain commodities.

Indonesia'€™s inflation surged to 8.4 percent last year, above the government assumption of 7.2 percent in the revised 2013 state budget.

Inflation in volatile and government-controlled commodities hit 16.7 percent and 11.8 percent, respectively, well above headline inflation, as the government'€™s move to limit imports disrupted suppliesof certain commodities and caused a spike in food prices.

To keep price levels in check, Bank Indonesia (BI) has lifted its interest rate to a three-year high of 7.5 percent. Recent developments, however, show a tighter monetary policy might be necessary to counter growing inflation expectations after core inflation '€” a measurement of long-term price levels that exclude prices of volatile food and government-controlled commodities '€” surged to 5 percent in December, the highest level since 2011.

'€œWe must be vigilant on core inflation that is recently showing an upward trend,'€ BI Governor Agus Martowardojo said.

The recent upward surge in core inflation was caused by price spikes in some commodities as well as a pass-through effect from the rupiah'€™s depreciation to domestic price levels, BI Deputy Governor Perry Warjiyo explained. The central bank says people'€™s purchasing power will hit between 3.5 and 5.5 percent this year and decline to between 3 and 4 percent next year. Meanwhile, the financial market has expressed optimism that both fiscal and monetary authorities would have the ability to keep inflation in check. Foreign investors have boosted their holdings in government bonds by Rp 1.9 trillion (US$157 million) since the beginning of this month to Jan. 13, data from the Finance Ministry'€™s debt management office shows.

This year'€™s inflation '€œshould not be a concern'€ for the bonds market, Bank Danamon economist Dian Ayu Yustina wrote in a note. Inflation is the major factor determining the appetite in the bonds market, as higher-than-expected inflation prints will erode investors'€™ returns in holding fixed-income instruments.

Other analysts argued that a slight upward tick in core inflation may be required to push down imports by reining in household consumption, which has stayed surprisingly strong over the past few months.

'€œFrom a trade balance perspective, cost-push inflation should be viewed positively,'€ Helmi Arman, an economist with Citi Research, wrote in a note released this month.

Rising core inflation could strengthen the country'€™s current account position by reducing imports, he argued.

It was also a sign that the transmission of BI'€™s latest policy adjustments was working, said Helmi, who predicted year-on-year inflation to top 4.9 percent this year.

{

Your Opinion Counts

Your thoughts matter - share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.

Enter at least 30 characters
0 / 30

Thank You

Thank you for sharing your thoughts. We appreciate your feedback.