May inflation creates new worries

May inflation creates new worries

Dadan Wijaksana, Jakarta

Prices increased faster in May than in April due to the weakening
rupiah and higher telephone charges, giving rise to concerns
about inflation that could force the central bank to start
raising interest rates.

The Central Statistics Agency (BPS) reported on Tuesday that
inflation in May rose by 6.47 percent from the same month last
year, stronger than the year-on-year inflation rate of 5.29
percent in April.

Compared to the previous month, inflation in May was up by
0.88 percent, the agency said.

"The inflation increase in May was mainly due to rises in the
cost of telecommunications, transportation and basic food
prices," said BPS chairwoman Soedarti Surbakti during a press
conference.

Telecommunications company PT Telkom raised local phone
charges by an average of 28 percent in April.

Meanwhile, the drop in the value of the rupiah against the
U.S. dollar has pushed up the cost of production for many
companies as they are dependent on imported raw materials.

The rupiah has fallen by 11 percent so far this year due to a
combination of economic uncertainties at home and overseas, and
also political uncertainty ahead of the July presidential
election. The local unit plunged to a 26-month low of Rp 9,380
per dollar on Tuesday.

The BPS said that basic food prices rose by 0.55 percent in
the month, while the cost of transportation and
telecommunications was up by 3.88 percent.

Other elements in the consumer price index (CPI) which also
experienced price increases are processed food and beverages
(up 0.21 percent), clothing (0.02 percent), health care (0.43
percent), and education and recreation (0.11 percent), the BPS
said.

Soedarti said that as the current weakening of the rupiah and
soaring oil prices would continue to stoke up inflationary
pressure in the months ahead, she predicted that inflation for
the full year would surpass the government's 6.5 percent target.

There have been increasing worries about the reemergence of
stronger inflationary pressures in the local economy particularly
due to the weakening of the rupiah and rising oil prices.

Stronger inflation could force the central bank to start
raising interest rates to both help curb inflation and defend the
local unit, which has been badly affected by news that the U.S.
Federal Reserve could start raising interest rates next month. As
a result, investors have switched from rupiah assets to dollar-
based assets.

But Bank Indonesia over the past weeks has been insisting that
it had no plans to raise interest rates soon despite a hike in
the U.S. rate. Raising domestic interest rates could harm the
country's economic growth.

Some Bank Indonesia officials have actually indicated that
there was still room for the central bank benchmark interest rate
to decrease further to around 6 percent this year from the
current level of around 7 percent.