CPI may fall to 5.5% if govt keeps subsidy

Indonesia’s inflation rate may be less than 5.5 percent in 2011 if the government maintains its fuel subsidy programs, according to a senior central bank official.

Bank Indonesia (BI) deputy governor for monetary policy Hartadi A. Sarwono said on Monday that the consumer price index (CPI) might increase in the coming months if the government raised subsidized fuel prices or followed through on a plan to prohibit the sale of subsidized fuel to private cars.

“If there is no change in the government’s fuel subsidy policy this year, our inflation rate can still be on target and below 6 percent. It will be 6 percent at the highest and might even be below 5.5 percent,” he told reporters after a meeting with the House of Representatives’ working group on inflation and the benchmark interest rate in Jakarta.

The government and lawmakers have indefinitely delayed a plan to limit fuel subsidies that was supposed to have gone into effect in April.

The government announced it would restrict the sale of subsidized fuel to private vehicle owners in Jakarta beginning in April.

The program was to be expanded to other parts of Java and Bali in July and to Sumatra and Kalimantan by 2013.

The plan was delayed on fears that lifting the subsidy would trigger strong protests from the public, which might lead to political chaos.

“The 5 plus-or-minus 1 percent target relies heavily on whether the subsidy limitation is going to be realized. If the fuel subsidy limitation is dropped, [headline inflation] might reach 6 percent or slightly below 6 percent for the full year,” BI governor Darmin Nasution said in March following the announcement of the delay.

The central bank has estimated that the headline inflation rate in 2011 would be between 4 percent and 6 percent, while the government forecasted 5.3 percent inflation in 2011.

Indonesia is one of several fast-growing emerging markets that is struggling to combat surging inflationary pressures, after its CPI peaked to a 21-month high of 7.02 percent in January due to volatile food prices.

Year-on-year inflation, however, declined to 6.16 percent in April on the back of additional rice supplies and a good harvest in the first quarter.

Several economists, including Bank CIMB Niaga’s Andry Asmoro, have cut their inflation forecasts for Indonesia to about 6 percent for 2011 after the government showed signs it would maintain the fuel subsidy at least for this year.

“It’s possible to reach 5.5 percent this year, if weather anomalies do not occur and staple food supply problems are resolved,” Andry told The Jakarta Post over the telephone, estimating that the nation’s inflation rate might reach 6 percent by year end, down from a previous forecast of 7 percent.

Government officials and economists have estimated that fuel subsidy limits might prompt a 0.3 percent to 1 percent spike in inflation and have a multiplier effect that might cause consumer prices to balloon.

Other than fuel subsidy issues, Hartadi said surging global commodity prices — mainly for food and energy — remained the major challenge for policy makers looking to keep inflation in check.

Global commodity prices hikes, according to Hartadi, would add about 0.2 percent to the country’s headline inflation rate.