Indonesia’s July inflation rate eases to lowest since February 2022
It drops to an annual rate of 2.13%, driven by lower prices of communication and financial services
[JAKARTA] Indonesia’s consumer price index decelerated more than anticipated, dropping to an annual rate of 2.13 per cent in July, driven by lower prices of communication and financial services, the statistics bureau reported on Thursday (Aug 1).
The figure was lower than a Reuters projection of 2.4 per cent, but remained within Bank Indonesia’s 1.5 to 3.5 per cent target range.
The July inflation marked the slowest rate since February 2022, said Amalia Adininggar, the acting head of the statistics bureau.
Core inflation, which strips out volatile items such as fuel, increased to 1.95 per cent from 1.9 per cent in June.
The statistics bureau noted that Indonesia experienced an increase in prices for items such as rice, chillies, sugar and cooking oils.
Rice, a staple food for 280 million Indonesians, began having price increases in July after a period of decline during April and May following the harvest season. The statistics bureau reported that rice prices in July rose by 0.94 per cent month over month.
Indonesia’s inflation rate of 2.13 per cent is among the lowest in the Asean region. In contrast, the Philippines is experiencing higher inflation, with a forecast of approximately 4 per cent for 2024, indicating persistent inflationary pressures.
Similarly, Thailand’s inflation rate is projected to be around 3 per cent for 2024, according to the Asian Development Outlook.
Sweet tax risk
With inflation remaining within the central bank’s target, analysts believe this could provide Bank Indonesia the opportunity to cut interest rates later this year.
Bank Indonesia kept its key interest rate unchanged at 6.25 per cent last month, though a potential cut is anticipated in the fourth quarter.
The central bank has maintained this high benchmark since the beginning of last year, having raised it by 25 basis points in October 2023 and again in April this year, establishing the current rate of 6.25 per cent.
However, Josua Pardede, chief economist at Bank Permata, suggested that inflationary pressures in the second half of the year could emerge from the introduction of taxes on plastics and sugary drinks.
The Indonesian government is looking to introduce a sugar tax law, which aims to curb the consumption of sugary beverages and generate revenue for health programmes. However, the proposed tax has sparked concerns about potential increases in the cost of food and drinks.
“There is a tendency for the government to delay these policies to support purchasing power and economic growth,” Pardede said.
On the other hand, inflation risks may decrease due to reduced import inflation, driven by the strengthening of the rupiah, which could be supported by potential interest rate cuts by the US Federal Reserve. This could foster risk-on sentiment and capital inflows.
Pardede also indicated that global energy price inflation is likely to be moderated by decreased global demand, driven by “slower growth for an extended period” in China.
Inflation is projected to be around 3.1 per cent by the end of 2024, compared to 2.6 per cent in 2023.
However, if the government decides to postpone the taxes on plastics and sugary beverages, he estimates that inflation could remain below 3 per cent by the end of 2024.
“This would support Bank Indonesia in lowering (its) rate when global policy rates, especially in the US, are reduced,” he added.
