Grace D. Amianti, Jakarta – The annual inflation rate is expected to remain under control through to the end of the year despite concerns the long dry season will affect harvests and eventually lead to higher food prices, analysts and officials have said.
The long dry spell across some Asian countries has been attributed to El Niqo, a weather phenomenon that affects temperature and rainfall. It is feared the situation will lead to crop failures and create distortions in the supply and demand of staple foods.
Enny Sri Hartati, an economist with the Institute for Development of Economics and Finance (Indef), says El Niqo could create a small spike in food prices in the next few months, even though weak consumer demand will continue to drag down inflation.
"I think the annual inflation rate will stay on track and indeed, the rate could be under the target because of declining purchasing power. The demand side has a significant influence on inflation despite a decrease in supply," Enny told The Jakarta Post on Sunday.
The national inflation rate rose by 0.54 percent in June, taking year-on-year (yoy) ratinflation to 7.26 percent. This was lower than the 0.67 percent month-to-month and 7.4 percent yoy rates estimated previously by economists surveyed by Bloomberg.
Central Statistics Agency (BPS) head Suryamin said concerted efforts by the government and Bank Indonesia (BI) had helped lower the June inflation rate, which was relatively low compared to the rate during previous Islamic fasting months of Ramadhan, when prices normally rise as a result of the seasonal increase in demand for food and other goods.
BI Governor Agus Martowardojo said the central bank expected July inflation, which will be announced by the BPS Monday, to come in at 7.13 percent yoy with annual inflation predicted to fall within its target range of 3 percent to 5 percent as a result of weak demand.
As the inflation rate eased, Agus signaled that BI could maintain its benchmark rate, which has stayed at 7.5 percent for five straight consecutive months as the central bank was bracing for a potential US Fed rate increase in September.
According to Enny, the inflation rate in July will be higher than June due to the lingering effects of Ramadhan and the Idul Fitri festivities. However, she was convinced that the July inflation rate had yet to be affected by rising food prices caused by the dry season.
BPS deputy chairman for production statistics Adi Lumaksono likewise said El Niqo would have a minimal effect on July's inflation rate as the dry season usually had a time lag before impacting on consumer prices.
Adi said food production, based on historical data, tended to decrease in the second harvesting season between June and August because of the country's dry season, even though its effect on the annual inflation rate was rather small.
"A hike in inflation is usually caused by Ramadhan and the Idul Fitri festivities because demand rises. So, those festivities are likely to affect July's inflation rate rather than the dry season," Adi told the Post.
DBS Bank's research team has said in a research note that potential impacts from the strengthening El Niqo might be one of the components that lifts food prices next year.
"We forecast inflation to be at average 5.7 percent in 2016, but we see risks that it may remain within the 6-6.5 percent range, depending on how severe the current El Niqo phenomenon turns out to be," the DBS economic team said.
President Joko "Jokowi" Widodo has ordered Coordinating Economic Minister Sofyan Djalil to prepare rescue plans for farmers suffering crop failures as a result of the prolonged dry season.
Jokowi also called for market inspections to combat speculators who might attempt to take advantage of price increases through the hoarding of food commodities.
The State Logistics Agency (Bulog) was also instructed to maintain rice stocks at up to 2.5 million tons until October as the government calculated that El Niqo could reduce the rice harvest by up to 300,000 tons nationwide.
Source: http://www.thejakartapost.com/news/2015/08/03/inflation-stay-check.html