The pace of Indonesia's monthly January inflation rate was higher in 2014 than in the same month during the past five years. This relatively high inflation rate this year, recorded at 1.07 percent, was caused by severe rainfall and floods in several parts of Indonesia (particularly in the cities of Jakarta and Manado) amid the peak of the rainy season. These weather-related circumstances impacted on prices of food products as distribution channels were disrupted, thus giving rise to increasing prices. Annual inflation, however, slightly eased.
Also the continuing depreciating Indonesian rupiah exchange rate, which makes imports more expensive, causes the country's retailers to increase their prices. In 2013, the rupiah lost more than 21 percent of its value against the US dollar as capital outflows emerged after the Federal Reserve started to speculate about an ending to its quantitative easing program in late May 2013. So far this year, Bank Indonesia's mid-rate depreciated 0.50 percent against the US dollar.
Core inflation, which excludes administered and volatile food prices, increased 4.53 percent year-on-year in January 2014, mainly because of the depreciating rupiah exchange rate.
On a year-on-year basis, Indonesia's consumer price index grew 8.22 percent in January 2014, thus slightly easing from 8.38 percent in the previous month. Inflation had accelerated significantly in 2013 due to the government's decision to raise prices of subsidized fuels in late June 2013. For the remainder of 2014 it is expected that inflation continues to ease although imported inflation, particularly manufactured and electronic goods, will provide some inflationary pressures in the months ahead. However, this will not significantly influence the pace of inflation and therefore inflation is estimated to ease more markedly in February and March. Expectations of various economists regarding Indonesian inflation for full 2014 vary between 5 percent and 7 percent, while the central bank targets roughly 4.5 percent of inflation.
Although inflationary pressures are traditionally higher in January, the market reacted mixed on the 1.07 percent inflation rate. Previously, it was expected that inflation would be kept below the 1 percent mark in the first month of 2014. As the outcome did not meet most analysts' prediction, the market is concerned that the benchmark interest rate of the central bank (BI rate) may be raised again if the institution feels that the easing pace of annual inflation (from 8.38 percent in December 2013 to 8.22 percent in January 2014) is too slow. The central bank raised its BI rate gradually from 5.75 percent in June 2013 to 7.50 percent by the end of last year in order to safeguard investors' confidence. Particularly in the context of the Federal Reserve's tapering, which can lead to capital outflows, another BI rate hike is a possibility.
(annual percent change)
Source: Statistics Indonesia