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Thursday, February 02, 2006

High inflation set to persist this year

Although the latest figures from the Central Statistics Agency (BPS) show year-on-year inflation slowing for the second month in a row to 17.03 percent in January, high inflation is set to continue looming large over the economy this year.

Despite the lower figure, monthly inflation still increased by 1.36 percent in January, in contrast to deflation of 0.04 percent in December.

The high inflationary pressure seems likely to persist amid increases in food prices resulting from seasonal floods that are likely to continue in many parts of the country for the rest of this month. This could prompt the central bank to further hike its benchmark interest rate to reduce price pressures.
"January's inflation was mainly driven by a rise in staple food prices, particularly of rice," BPS director Choiril Maksum said.

"We recorded increases in rice prices of between 2 and 23 percent, contributing up to 0.6 percent to this month's inflation rate."
Staple food prices as a whole were the largest contributors to January's inflation, rising by as much as 4.26 percent and contributing 0.94 percent to the inflation rate.

The price of rice rose despite the government importing 110,000 tons to secure stocks and stabilize prices. Flooding across the country has been threatening the rice harvest, which is likely to further push up rices prices.

Besides staple food prices, consumers also saw a 0.70 percent rise in transportation, communication and financial services costs, which contributed 0.18 percent to January's inflation rate. Another main contributor was processed foodstuffs, whose prices increased by 0.94 percent.
However, the prices of gasoline, kerosene, cooking oil and vegetables and fruits fell.

Apart from headline inflation, the BPS also reported that core inflation, which excludes volatile prices, such as those of food, and regulated prices like utility rates, was up 0.72 percent month-to-month and 9.68 percent year-on-year.
The BPS, in collaboration with Bank Indonesia, has started this year to report core inflation, which the central bank relies on in deciding its macroeconomic policy.

The government has officially targeted full-year inflation of 8 percent in this year's budget.

Year-on-year inflation stood at 18.38 percent in November, the highest level in six years, as costs rose following the October fuel price hikes and as a result of increased food consumption during the Idul Fitri season.

BI has forecast that monthly inflation will remain at 3.19 percent in the first quarter before easing to 2.36 percent in the fourth quarter, ending up at a year-on-year level of between 7 and 9 percent. The forecast has already factored in possible power rate hikes, although only up to a maximum of 30 percent.
Commenting on the possible electricity hikes, Choiril said that an increase of between 15 and 40 percent could up inflation by between 0.4 and 1 percent.
"If electricity prices rise by 30 percent, then inflation will increase by 0.9 percent," he said. "And this is just the direct effect -- we have yet to calculate the knock-on effects."

Separately, Finance Minister Sri Mulyani Indrawati said that monthly inflation was expected to remain high until March at the earliest.
"Afterward, we expect inflation to ease," she said. "We will from then on be particularly cautious about months with holidays and the year-end in order to keep inflation at those times in check at below 1 percent."

The Jakarta Post

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