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Indonesian inflation slows on lower raw food, clothing prices

December 4, 2012 Jakarta Post
Triggered by an ease in prices of raw food, clothing and housing-related costs, November’s inflationary pressure slowed to 4.32 percent on a year-on-year (y/y) basis from 4.61 percent in October, according to the Central Statistics Agency (BPS).

The figure was below the market forecast of 4.6 percent, and was also lower than 4.6 percent y/y recorded in the same period of last year.

“November’s inflation is usually quiet high. Last year, inflation stood at 0.33 percent in November, but this year it stood at 0.07 percent,” said BPS distribution statistics and service deputy head Sasmito Hadi Wibowo.

“For 2012, we expect inflation to stand below 5 percent, which is under the government’s target of 5.3 percent,” he said.

BPS price statistics director Yunita Rusanti said that low inflation in November was triggered by declining prices of food commodities, such as chili and chicken.

“The production of those commodities exceeded the market’s demand. Thus, their prices declined,” she said.

She also explained the ease in clothing and housing prices.

Lower inflation is expected to keep the central bank’s lower interest-rate policy intact to help boost consumers’ purchasing power in propelling economic growth amid global economic turmoil, which has shed demands for Indonesian goods.

Bank Indonesia (BI) has kept its benchmark interest rate unchanged at a record-low of 5.75 percent for the past nine months.

However, economists remain cautious over next year’s inflationary pressure given the impact from higher minimum wages against relatively robust growth.

Barclays economist Prakriti Sofat had revised up the bank’s inflation forecast for 2013 by 40 basis points to 5.4 percent. “Our forecast is based on the assumption that the 15 percent electricity price hike penciled-in the budget does not materialize. BI’s forecast is 4.8 percent without an electricity price hike and 5.1 percent with the electricity price hike,” she said.

She also said the recent 44 percent increase in Jakarta’s minimum wages had raised investor concerns about inflation impact. Other regions have also proposed increases ranging from 10-40 percent.

“The direct weight of wage-related components in the national consumer price index (CPI) is around 1-1.5 percent, but not all workers are covered by the minimum wages. We believe the impact will likely come through second-round effects — as the cost of production increases,” she said.

However, she said, strong competition among companies to maintain or gain market shares might limit the extent of pass through.

“Higher wages will boost consumption, fanning demand-side inflation. But there is the risk that businesses may fire workers, especially in the small and medium-sized enterprises. Our base case currently is a 30-40 bps [basis points] boost to headline inflation on account of minimum wage adjustments,” said Sofat.

In response to the easing inflation in November, Indonesia’s bonds rallied, pushing the yield on 10-year notes to a nine-month low.
Company — Indonesia
  • Full name
    Republic of Indonesia
  • Registration country
    Indonesia