Inflation softens to 5.28%, further alleviates pressure on Bank of Indonesia

Inflation in January was driven particularly by higher prices for food, beverages and tobacco, with Statistics Indonesia registering an annual increase of 5.82 per cent for that category.

Billy Adison Aditijanto

Billy Adison Aditijanto

The Jakarta Post


Shoppers walk through a market on the eve of the Lunar New Year in Surakarta, Central Java, on Jan. 21.(AFP/Adek Berry)

February 2, 2023

JAKARTA – Indonesia’s inflation mellowed in January but remains well above the central bank’s target and varies widely from one city to another.

Headline consumer price index (CPI) growth dropped to 5.28 percent year on year (yoy) from 5.51 percent yoy in December.

Month-to-month (mtm), the CPI rose 0.34 percent in January, easing from a 0.66 percent mtm rise logged in December 2022.

“This year’s inflation is still relatively high, […] but if we compare it with December 2022, January’s inflation is shrinking,” Statistics Indonesia (BPS) chief Margo Yuwono said at a press conference on Wednesday.

The city of Kotabaru in Kalimantan recorded the highest inflation rate at 7.78 percent yoy, while Bandung saw the highest inflation in Java at 7.37 percent yoy. That compares to a mild rate of just 3.23 percent in Sorong, West Papua.

Inflation in January was driven particularly by higher prices for food, beverages and tobacco, with BPS registering an annual increase of 5.82 percent for that category. Red chili and bird’s eye chili were the highest individual contributors to inflation with increases of 10.9 percent mtm and 17.85 mtm, respectively, while rice came third at 2.34 percent mtm.

“If we can stabilize the price of food, then [headline] inflation will decrease in the second half [of 2023],” Mandiri economist Faisal Rachman told The Jakarta Post on Wednesday. “We have to anticipate food price hikes, rice in particular,” he added.

Transportation prices, meanwhile, were up a whopping 13.91 percent yoy because of higher fuel prices and airfares, but this category has less impact on the overall index than that of food, beverages and tobacco. On the month, transportation prices saw a 1.15 percent decline in January.

Margo warned that the government should keep the rupiah exchange rates in mind as Indonesian food imports remained high, while also anticipating extreme weather for this year.

“We have to pay attention to our food stocks, so that in periods when we are not harvesting, we will have enough in store and can stabilize prices,” Margo said.

Core inflation, which has become the de facto basis for Bank Indonesia’s (BI) interest rate policy, was up by a relatively benign 3.27 percent yoy in January, dropping slightly from 3.36 percent in December. At that level, it remains safely within BI’s target range of 2 to 4 percent.

“Core [inflation] is within target, but lowering the headline inflation will take some time. We estimate that the headline will return to the 2-to-4-percent range in the second half of this year,” Faisal said.

Similarly, BI has expressed confidence that headline inflation will come back down to the 2-to-4-percent target range in the second half of this year.

Indonesia’s inflation made a jump in September last year when the government hiked prices of several types of fuel.

Prices of goods with government-controlled prices, which includes most fuel sold in the country, were up 12.28 percent yoy, moderating somewhat from the 13.34 yoy increase seen in December. They were pushed up primarily by costlier fuel, higher transportation fares and higher prices for filter cigarettes and household gas.

The impact from the second-round subsidized fuel price increase on other goods and services will diminish in the later half of 2023 against the background of declining global energy and fuel prices, Faisal said.

“We forecast inflation to be around 3.6 percent at the end of 2023, supporting our forecast for BI [rates] to stay flat at 5.75 percent for the remainder of 2023,” he added separately.

The only category that experienced deflation was that of information, communication and financial services, which saw a 0.22 percent yoy drop. However, because this is the lowest contributor to the CPI among all BPS inflation categories, it pushed the overall inflation index down by a mere 0.01 percent.

Prices in that category were up 0.01 percent mom with no discernible impact on the monthly CPI trend in January.

The writer is an intern at The Jakarta Post.

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