Country Report Indonesia May 2011

Economic performance: Food prices fall but core inflation still accelerates

The rate of inflation, as measured by the consumer price index, slowed in April, to 6.2% year on year, from 6.7% in March, while consumer prices fell by 0.3% month on month, following a decline of 0.3% in March, according to BPS. The slowdown in inflation came about as a result of lower prices for staple foods during the main rice harvest season. Food prices rose by 11.1% year on year in April, down from 13.6% in March, but fell by 1.9% month on month. In a sign that it is satisfied with domestic food supplies, on April 1st the government reintroduced import duties on rice, after suspending duties for four months owing to concerns of supply shortages and rising prices. Duties on rice and rice flour have been restored to the previous rate, of Rp450 (5 US cents) per kilogram. Core inflation, however, which excludes food and fuel prices, accelerated to 4.6% year on year in April, from 4.5% in March. The upward trend in core inflation suggests that BI will be required to raise the benchmark interest rate later this year. The central bank had previously indicated that it would raise interest rates if core inflation rose above 5%. BI has raised the benchmark interest rate once already this year, with a 25-basis-point increase announced in February.

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