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Jakarta Post

Bank Indonesia shifts focus to supply-side of inflation

  • Satria Sambijantoro

    The Jakarta Post

Jakarta   /   Tue, April 22, 2014   /  11:05 am

The central bank says it will improve efforts to control inflation from aggregate supply, such as those affected by volatile food prices, by strengthening the role of its regional inflation control teams (TPIDs).

Bank Indonesia (BI) Governor Agus Martowardojo says he will deploy more human resources to TPID branches across the archipelago '€” and post additional regional economists there '€” to tackle inflationary pressures at the regional level, which economists say are behind the spike in overall inflation.

The central bank'€™s TPIDs are tasked with coordinating with the government to reduce inflation by monitoring food supply and distribution in their areas, as well as coordinating with relevant government institutions.

'€œWe will also establish two new TPID offices in Bangka Belitung and West Papua. This shows that both the government and Bank Indonesia are really serious about reducing inflationary pressures,'€ he said on Monday.

Agus highlighted the need for Indonesia to take extra measures to reduce inflation to boost the country'€™s competitiveness.

Indonesia'€™s annual inflation rate, which hit 8.3 percent last year, is well above its neighbors, such as the Philippines with 3 percent, he noted.

Indonesia'€™s high inflation rate has been attributed to supply problems, as the consumer price index (CPI) is greatly influenced by the fluctuation of prices for volatile commodities, which are affected by unpredictable aspects such as weather and food supply.

Indonesia has frequently seen volatile food inflation soar far above core inflation, which is a long-term measurement of price levels closely related to demand-pull inflationary pressures, such as consumers'€™ purchasing power.

Volatile food inflation soared to 15.1 percent in July last year, when a restriction on imports, jointly implemented by the Trade Ministry and the Agriculture Ministry, caused food shortages in certain areas.

In March, year-on-year inflation of food with volatile prices stood at 7.25 percent, not far below the headline inflation level of 7.32 percent, but still far higher than Indonesia'€™s core inflation rate of 4.61 percent.

This means that inflation is not entirely a monetary phenomenon in Indonesia, as the central bank'€™s monetary tools can control inflation by pushing down aggregate demand, meaning that BI cannot rely solely on interest rate adjustments to manage price levels, economists have said.

'€œFor BI to control inflation, increasing interest rates has its limitations, as it can only push down inflation from the demand side, not from the supply side,'€ Lana Soelistianingsih, an economist with Samuel Aset Manajemen, said recently. '€œMeanwhile, our inflation is mostly affected by supply-side factors that are related to the sufficiency of food supply and distribution.'€

High inflation is a threat to people'€™s purchasing power and will ultimately affect domestic consumption, which is Indonesia'€™s biggest growth driver that accounts for 55 percent of its gross domestic product (GDP).

Last year, Indonesia'€™s GDP growth slowed to a four-year low of 5.8 percent after annual inflation soared to 8.4 percent '€” well above the government'€™s initial target of 7.2 percent as stipulated in the state budget '€” due to the overshooting of food prices because of the restriction on horticulture imports.

'€œIt'€™s important to manage inflation as it is the specter that could drag down economic growth,'€ Coordinating Economic Minister Hatta Rajasa said on Monday.

'€œTo do that, monetary policy is not enough, as we will need to implement further policy reforms in the real sector.'€

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