Drought

Inflation in Indonesia: Rising Pressures Due to La Nina?

Agus Martowardojo

Edited by CCB

3 May 2016

El Nino, which started to make its presence felt in mid-2015, is a weather phenomenon that involves periodical warm ocean water temperatures off the western coast of South America. This can cause climatic changes across the Pacific Ocean; it brings dry weather to Southeast Asia and therefore disturbs the output of agricultural commodities. Although El Nino occurs once every five years on average, it can pass almost unnoticeable, while at other occasions its effects are felt heavily, worldwide. The El Nino cycle that occurred in 2015-2016 was the heaviest in nearly 20 years, with its peak in December 2015. This impacted on harvests across Indonesia. For example, output of crude palm oil was curbed significantly in both Indonesia and Malaysia, the world’s leading palm oil producers, explaining why palm oil prices have been surging recently.

La Nina is a weather phenomenon that brings cooler-than-average sea temperatures in the central and eastern tropical Pacific Ocean, hence causing wetter-than-usual weather in Southeast Asia. Just like El Nino-inflicted droughts disturb agricultural output, La Nina-inflicted heavy and prolonged rainfall also disrupts harvests (due to floods or landslides). Analysts claim that there exists a 75 percent chance of La Nina making her presence felt in the second half of 2016. Cooler and wetter weather conditions would be particularly tough in case the impact of La Nina is felt during Indonesia’s rainy season (which starts in October).

If indeed La Nina will bring additional rains later this year, then there should emerge inflationary pressures in Indonesia as prices of several strategic food products – such as onions, chilies, beef and chicken meet – will rise. Bank Indonesia Governor Agus Martowardojo has already issued a reminder that the nation needs to safeguard supplies of these strategic food items (as well as the distribution network) in order to avert suddenly jumping inflation.

This year Bank Indonesia targets an inflation rate in the range of 3 – 5 percent (y/y). So far this year, inflation has been under control, supported by low energy prices. However, starting from June inflation is expected to rise due to an increase in consumer spending amid the holy fasting month (Ramadan) and ahead of the Idul Fitri celebrations in early July. There usually occurs a peak in inflation in Indonesia in the June-August period due to these Islamic celebrations as well as the start of the new school year in August.

Regarding Indonesia’s May inflation several analysts believe inflation will be limited below 0.3 percent (m/m) as food supplies are under control with the harvest season still ongoing in May.

Inflation in Indonesia:

Month  Monthly Growth
2013
 Monthly Growth
2014
 Monthly Growth
2015
 Monthly Growth
2016
January          1.03%          1.07%         -0.24%          0.51%
February          0.75%          0.26%         -0.36%         -0.09%
March          0.63%          0.08%          0.17%          0.19%
April         -0.10%         -0.02%          0.36%         -0.45%
May         -0.03%          0.16%          0.50%
June          1.03%          0.43%          0.54%
July          3.29%          0.93%          0.93%
August          1.12%          0.47%          0.39%
September         -0.35%          0.27%         -0.05%
October          0.09%          0.47%         -0.08%
November          0.12%          1.50%          0.21%
December          0.55%          2.46%          0.96%
Total          8.38%          8.36%          3.35%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank Target 2008-2015:

 2008  2009  2010  2011  2012  2013  2014  2015
Inflation
(annual percent change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4   3.4
Bank Indonesia Target
(annual percent change)
  5.0   4.5   5.0   5.0   4.5   4.5   4.5   4.0

Source: Bank Indonesia

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