Thursday, February 02, 2006

Inflation Update

The inflation data for January 2006 is up on BPS’ website. It is 1.36% month-on-month, or 17.03% year-on-year. This is slightly lower than LPEM-FEUI’s estimation of 1.44% and 17.12%. Unless the floods continue to halt paddy harvesting, we expect a deflation in February by 0.17%.

The Statistics Office (BPS) reported that the major driver of the high January inflation was rice price increase. HKTI and DPR, are you happy now? The Bulog’s rice import of 110,000 tons failed to stabilize the price. Again, it is proven that Bulog is ineffective. The solution to this should be straightforward. Don’t rely on Bulog. Just allow everybody to import. (I should’ve titled this post “The Politics of Rice 14”, no?).

In the meantime, people have started to make fuss on the likely increase of electricity rate. However, a 50% increase (already happened in some regions) in rice price is more harmful than 30% increase (popular estimate) in electricity rate, as far as inflation is considered. As we estimate, the former will add 4.3% to the inflation, while the latter 0.89%. But, the second round inflation should also be expected. It seems that the government doesn’t learn from past mistakes. By keeping silent on the exact rate of increase the government is again toying with people’s expectation. Last year inflation was driven more by expectation amid the uncertainty and mixed signals from government officials. Now, they’re doing it again with electricity rate.

There’ve been talks over the January’s inflation figure, that Bank Indonesia might increase its policy rate again next week. I would think it’s premature, even though it's not impossible, considering that the Fed has raised its rate to 4.5% last Tuesday.

BPS also reported that the 2005 export value hit a record high of 19.53%. We shouldn’t be overly happy with this. Note, the number reported is value. That is, price times quantity. Last year export was driven by mining sector, whose world price rose significantly. So it’s not that we exported a lot; only that the price was good. If we are for promoting more export (in quantity, not just relying on international price), we should continue cleaning up the mess in customs and duty clearance procedure.

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