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NEWS UPDATES Asean Affairs                2  August 2011

Indonesian food prices bring down inflation

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Indonesian inflation slowed to a 14-month low in July amid falling prices for food items, bolstering the case for the central bank to keep its key interest rate unchanged at next week's monetary policy meeting.

The consumer price index increased 4.6 percent year-on-year in July, Central Statistics Agency (BPS) data showed on Monday. Price rises have not been that slow since May 2010, when the index rose 4.2 percent. It was also the sixth straight month that inflation eased, after peaking at 7.0 percent in January.

July's inflation was also lower than the median estimate of 4.8 percent in a survey of 11 economists.

Above average rainfall last year caused harvesting to be delayed, contributing to a spike in prices for chili, rice and sugar.

Chili prices soared as high as Rp 100,000 ($11.80 at today's exchange rate) per kilogram at the end of last year from typical prices of Rp 15,000 to Rp 20,000 a kilogram. Chili climbed to about Rp 55,000 a kilogram in July last year. Food items make up about 30 percent of the weighting in the CPI.

"Chili, which contributed to the huge base effect from last year's spike, is also still fairly behaved at this juncture," said Wellian Wiranto, an economist at HSBC in Singapore.

"All in all, Bank Indonesia is very unlikely to move on its policy rate anytime soon."

The central bank, which meets next Tuesday, has kept monetary policy steady since February, when it raised its overnight policy rate by a quarter percentage point to 6.75 percent. Bank Indonesia has maintained the spread between its key rate and the inflation rate at about 1 to 2 percentage points in the past three years.

Core inflation, which excludes volatile foods and energy prices, was recorded at 4.6 percent year-on-year in July. It was lower than the 4.7 percent median of six estimates gathered by the Globe. The central bank in January said core inflation beyond 5 percent could trigger monetary policy tightening.

Still, even as annual inflation slowed, prices on a month-to-month basis rose. The non-seasonally adjusted monthly inflation accelerated in July to 0.67 percent, versus June's 0.55 percent.

Food prices typically rise ahead of and during the Muslim fasting month of Ramadan, which started on Monday, as families share breakfast and evening meals after fasting, putting upward pressures on prices.


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