Low inflation: A vegetable vendor transacts with a buyer at a traditional market in Tanah Abang, Central Jakarta, on Monday
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Inflation in July was lower than previously estimated thanks to coordinated efforts by Bank Indonesia (BI) and the government to manage food supply throughout the archipelago.
The Central Statistics Agency (BPS) reported Tuesday that monthly inflation hit 0.93 percent in July, a relatively benign level considering that the central bank earlier estimated inflation could top a maximum of 1.2 percent last month when the nation observed Ramadhan and celebrated Idul Fitri, when food prices usually rise.
The July monthly inflation figure took year-on-year inflation to 4.53 percent, with annual inflation finally returning to the central bank's target range due to the different base price effects, after the government hiked fuel prices in June last year.
BPS head Suryamin noted that the latest inflation reading was 'relatively low' compared to its normal pattern in July, a reflection of successful coordinated efforts by the government and BI in monitoring food supply and distribution throughout the archipelago.
'This year, I noticed that efforts to control potential shocks in food prices [due to Idul Fitri festivities] were conducted way before the fasting month,' Suryamin said in a press briefing.
Annual core inflation ' a measurement of long-term price levels that exclude volatile food and government-controlled commodities ' stood at 4.64 percent, compared to the 4.8 percent the country registered in May and June.
Volatile food prices contributed the most to inflation, with price increases for commodities such as fish, meat, eggs and water spinach particularly noticeable, according to the BPS head. Another aspect driving up inflation was the rise in transportation fares due to the widespread exodus for the Idul Fitri holiday, he added.
Inflation may fall below 5 percent this year, given the recent pattern in the economy, BI Governor Agus Martowardojo told reporters at his Jakarta office on Monday. That would be well within the 4.5 plus/minus 1 percent inflation range targeted by the central bank for this year.
Despite the satisfactory inflation prints, analysts have argued that there might be little room for the central bank to ease its monetary policy and adjust down its benchmark BI rate, which has been kept unchanged at 7.5 percent since November last year.
US-based investment bank Goldman Sachs said last month that it had amended its BI rate forecast from no change to a hike this year, citing possible further subsidy rationalization and dry weather due to a possible El Niño effect, both of which might drive up price levels in the economy.
'With inflation now back into Bank Indonesia's target range, we continue to expect no change in policy in the near future and believe the hurdle for near-term easing is high,' ANZ Bank economists Daniel Wilson and Glenn Maguire wrote in a note released on Monday.
'Fuel price hikes, the timing of which is uncertain, will clearly fall within the current monetary policy horizon,' they continued. 'We highlight the risk that Bank Indonesia may act within this short window before fuel prices are hiked again in the fourth quarter, or early 2015.'
Top BI officials have repeatedly stated that, despite the downward trajectory of inflation, the tight monetary policy would remain necessary to narrow the current-account deficit and keep the country's external balance health in check.
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