Inflationary pressure is expected to remain at the lower level of the government’s and Bank Indonesia’s (BI) targets by year-end after a benign increase in October due to largely controllable food price increases.
The Central Statistics Agency (BPS) announced on Tuesday that prices increased by 0.14 percent on a month-on-month basis in October, making inflation reach 2.11 percent during the January-October period.
Meanwhile, year-on-year (yoy) inflation stayed at 3.31 percent compared with the 3.07 percent recorded in September.
An increase in house rents, electricity and water prices contributed the most to the inflation with 0.56 percent, followed by processed food, beverages and cigarettes at 0.24 percent. Prices of raw food, such as eggs, poultry, shallots and fish, declined by 0.21 percent.
In terms of the inflation components, administered price, which is the prices of goods regulated by the government, showed the highest inflation with 0.57 percent, followed by core inflation at 0.1 percent and volatile food that saw a deflation of 0.26 percent.
“The pattern is unusual as it is usually the volatile food price that moves wildly, not the administered price,” BPS head Suhariyanto said.
Among the price increases in administered goods were electricity, household gas and cigarette excises.
State-run electricity firm PT PLN increased in October electricity prices for around 12.5 million customers, whose power consumption is between 1,300 volt-ampere (VA) and above 30,000 VA.
The Finance Ministry has also raised the tobacco product excise to 11.33 percent this year.
Analysts attributed the core inflation falling to below headline inflation to the stronger rupiah against the US dollar and a decrease in the gold price.
“The decreasing gold price is caused by lower global price and also low demand from the domestic market in which people sold their jewelry after Idul Fitri celebrations,” Maybank Indonesia economist Juniman said.
Juniman along with Danamon economist Wisnu Wardana and CIMB Niaga chief economist Adrian Panggabean projected that inflation would remain well within the government’s target of 4 percent and the central bank’s of between 3 and 5 percent.
“We project that inflation will stay at 3.15 percent yoy by year-end as there will be no spike in meat prices like what happened in December last year,” Juniman said.
Given the results so far this year, inflation could remain well within the lower level of the target, Adrian wrote in a research note, expecting the rate to stand at 3.5 percent for the whole year.
The lower inflation rate leaves questions about whether the central bank will further cut its benchmark interest rate after slashing it for the sixth time this year last month.
BI governor Agus Martowardojo has said the central bank was still maintaining its easing policy. He expected inflation to remain near the lower end of BI’s target range, at 3.1 percent at year-end.
“Monetary policymakers have repeatedly suggested that room for further easing [in the interest rate] is still available,” Wisnu said.
However, the government should also be aware that low inflation may well reflect people’s weak purchasing power. “The weakening purchasing power is not good for the economy in the long run,” Juniman said.
Indonesia’s economy relies heavily on private consumption, accounting for more than 60 percent of its economic growth.