Indonesia Inflation


Indonesia: Inflation falls to one-year low

July 1, 2011

In June, consumer prices increased 0.55% over the previous month, above the 0.12% rise tallied in May. Prices were higher in all categories of the CPI basket. In particular, prices in the food category soared 1.27% month-on-month, increasing for the first time since the beginning of the year and mainly reflecting higher rice prices. Food price pressures are likely to persist in the short term, as the Muslim fasting month (Ramadan) begins on 1 August and will see a seasonal spike in prices for items such as food products as well as clothing. Despite the pronounced price increase, annual inflation eased from 6.0% in May to 5.5% in June, coming in a notch above market analyst expectations, which had seen inflation falling to 5.4%. The headline figure benefited from last year's base effect associated with adverse weather conditions, which pushed up food prices. Annual average inflation remained unchanged in June at May's 6.3%. As inflation temporarily eased, the Central Bank left the benchmark interest rate unchanged at 6.75% for a fifth straight month at its meeting held on 12 July. Nevertheless, upside risks to inflation remain, as the Deputy Finance Minister Anny Ratnawati announced on 28 June that the government may limit the volume of fuel subsidies this year, which is beginning to weigh on the government's finances. If implemented, the measure to constrain consumption of subsidized fuel will maintain the budget deficit at 2.1% of GDP but will result in higher inflation. The Central Bank set an inflation target of 5.0% 1% for this year and 4.5% 1% for 2012.


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