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Indonesia's inflation soars more than expected, driven by food prices - highest seen since 2017

Tan KW
Publish date: Sun, 03 Jul 2022, 10:16 PM

JAKARTA, July 3 : Domestic inflation has risen faster than expected by either the government or Bank Indonesia (BI), setting a new record since June 2017 as food and transportation prices soar.

Statistics Indonesia (BPS) announced on Friday that the consumer price index (CPI) increased by 4.35 percent year-on-year (yoy) in June, marking a significant acceleration from the 3.55 percent rate reported for the preceding month.

On a month-to-month (mtm) basis, inflation also increased, rising to 0.61 percent in June from 0.4 percent in May, which is still lower, however, than the 0.95 percent seen in April.

At 4.35 percent, the headline inflation figure in June exceeds what the central bank had thought would be the peak of inflation this year, namely 4.2 percent. Economists at state-owned Bank Mandiri had expected June's inflation to be 4.26 percent yoy.

"This is the highest inflation since June 2017, when our inflation was 4.37 percent yoy," BPS head Margo Yuwono said in a virtual press conference on Friday.

The World Bank in a report published in June estimated that Indonesia’s 2022 inflation would average 3.6 percent.

The expenditure category of food, beverages and tobacco continued to be the dominant driver of inflation in June, as it alone accounted for 0.47 percentage points of the overall 0.61 percent mtm CPI increase.

Prices in the category itself were up 8.26 percent yoy in an increase mainly attributed to unfavorable weather.

The second-biggest inflation driver in June, as it had been in May, was transportation, which accounted for 0.04 percentage points of the monthly rise.

Transportation prices in June were up 5.45 percent yoy amid a massive increase in global oil prices BPS data show that Indonesia booked a US$1.85 billion deficit in oil and gas trade in May, when crude oil cost almost 70 percent more than a year earlier.

"The increase in air freight rates contributed 0.03 percentage points [to the mtm CPI increase], because there was a rise in avtur prices, which had an impact on [surcharges]," Margo added.

The three commodities contributing most to annual inflation in June were red chili peppers at 0.35 percentage points, cayenne peppers at 0.1 percentage points and red onions at 0.17 percentage points.

Heavy rainfall was recorded in key cultivation regions of those commodities, such as Java Island and West Nusa Tenggara.

"This disturbance in the red chili and cayenne pepper production centers caused crop failure, so that the supply was disrupted due to the abnormal weather in the month of June," he continued.

Goods with administered prices, or prices controlled by the government, contributed 0.05 percentage points to monthly inflation in June, as those goods were 5.33 percent more expensive than a year earlier.

Core inflation, meanwhile, stood at just 2.63 percent yoy in June, as it excludes the rapid rise in goods classified as having particularly volatile prices, which were up a whopping 10.07 percent yoy.

Margo explained that the rise of administered prices had so far been kept in check by increased government subsidies on energy, noting that the government's ability to sustain this policy would be “decisive” for the further development of inflation.

He said he expected that, assuming more favorable weather conditions, the supply of food would increase and potentially reduce inflationary pressure in the next few months.

On the same day as BPS announced the latest inflation figures, BI Governor Perry Warjiyo revised upward its inflation forecast for the full year to the range of 4.5 to 5.5 percent yoy in a session with the House of Representatives, around a week after the previous upward revision during BI’s last governor's meeting.

The central bank stated that any change in interest rates would be done in consideration of core inflation rather than headline inflation. BI’s target range for both overall inflation and core inflation is 2 to 4 percent.

At the same event, Finance Minister Sri Mulyani Indrawati concurred with Perry's new forecast, noting that geopolitical dynamics were changing economic constellations around the world.

"With the rise of inflation, a more coordinated response is needed between fiscal and monetary policy," she said.

Economists from Bank Mandiri stated on Friday that inflation would continue to rise significantly early in the second half of the year, particularly food prices.

"We are aware that food inflation is prone to keep rising amid the global food security issues. This will drive cost-push inflation [...] up, raising the inflationary risk of volatile price inflation," they stated in a note received by The Jakarta Post.

Center of Economic and Law Studies (CELIOS) director Bhima Yudhistira said that, to mitigate the risk of uncontrolled inflation, the government should increase the budget allocation for subsidizing fertilizer, as costly fertilizer was driving food prices.

BPS data show that the price of fertilizer was up 16.3 percent yoy in June amid reduced supplies from important exporters such as China, Russia and Ukraine.

"[The government should also] cut convoluted distribution chains, because the increase in food prices does not bring wealth to farmers but to speculators or wholesalers," he said in a written message to the Post.

 - ANN

 

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