NEWS FOCUS: PRICE HIKES EXPECTED TO HAVE LITTLE EFFECT ON INFLATION TARGET BY ANDI ABDUSSALAM

Jakarta, June 26 (ANTARA) - Prices of consumer goods in several parts of the country have begun to rise in the face of the government's plan to raise the basic electricity tariff (TDL) by an average of 10 percent early July but the upward price trend is unlikely to affect this year's inflation rate forecast of 5, plus and minus 1, percent.

"It will have no significant impact on the inflation rate," Bank Indonesia (BI) Deputy Governor S. Budi Rochadi said. He predicted the planned electricity tariff hike effective early July will have little effect on the inflation rate so that the on-year inflation rate was likely to match the bank's forecast of 5, plus and minus 1, percent in 2010.

The BI deputy governor said that as the power tariff hike was only to apply to customers with an installed capacity of more than 900 VA, the inflation rate would likely increase by 0.2 percent.

So, the country's inflation this year is expected to remain at previously predicted level of 5 percent, even though there will be a post-fasting month and year-end festivities during which prices usually soar.

"The inflation rate forecast of 5 percent already includes the planned electricity tariff hike," Perry Warjiyo, BI's director of economic research and monetary policies, said meanwhile.

He said the inflation target for 2010 remained unchanged despite inflationary pressure in May caused by non-fundamental factors including volatile prices in the food sector. "The inflationary pressure at the start of this year was caused by the rising prices of rice and in May by the rising prices of food seasonings such as red chili, and garlic," he said.

The Central Bureau of Statistics (BPS) said early this month the on-month inflation rate in May reached 0.29 percent, bringing the year-on-year inflation rate to 4.16 percent.

"One of the factors pushing up the May inflation was the rising price of garlic. Much of the national need for garlic is supplied by China. Because of tight import policy the price of garlic rose and affected inflation," he said.

Given the slight inflationary pressure, the on-year inflation would match the bank's forecast of 5, plus and minus 1, percent, he said.

Bank Indonesia's prediction is almost the same as that made by the World Bank. The World Bank has predicted that Indonesia's inflation rate in 2010 will reach 5.1 percent despite an expected surge in consumer prices in the second semester.

"The unexpected bearishness in the first semester in 2010 and volatile food prices have caused a lowering of the annual projection of inflation," World Bank's lead economist Shubhan Chaudhuri said.

He said the House of Representative's (DPR) approval of a 10- percent hike in electricity prices seemed to cause only a slight impact on inflation and was an initial step in connecting the regulated price of energy with the economic cost of the energy.

"The electricity price hike will have a small impact, just one- or two-tenths of a percent on inflation," he said.

He said the biggest electricity price hike would be borne by commercial and rich customers while the price for household consumers would not change meaning the hike would only have a small direct impact on the Consumer Price Index.

In 2011, however, inflation was predicted to be higher because of a rise in commodity prices, the weakening of the depreciation of the rate of exchange to a lower level, initial adjustment to the 10 percent electricity hike, projection of speedy money and credit growth and increased demand.

"The recovery in stages of economic activity is absorbing the capacity that has not been used and speedy credit expansion will spur demand-pull inflation as of early 2011," Shubham said.

The higher than expected world demand for raw materials, metals and oil that have caused an increased revision of indices of world commodity prices would cause higher cost of distribution for business players through consumer goods as of early 2011.

"This is what has made inflation forecasts for 2011 to rise to 6.3 percent from initially 6.0 percent," Shubham said.

This would cause BI to raise its benchmark rate. This year alone BI is predicted to increase its key rate at about 0.25 - 0.25 percent.

According to PT OCBC NISP chief commissioner Pramkti Surjaudaja, the government's plan to increase the basic power rates and the fuel oil prices will push up the inflation rate, and cause BI's key reference rate to be raised by 0.25 to 0.50 percent.

The 10-percent increase in the electricity tariff for middle and upper class consumers will lead Bank Indonesia to increase its benchmark rate by about 0.25 percent to 0.50 percent by the end of this year.

Therefore, Vice President Boediono has asked for continued monitoring of the inflation rate in 2010 ahead of the Muslim fasting month. After all, financial crisis in Europe could escalate and affect the country's economy.

"The rate of inflation must be closely watched moreover now following a financial crisis in Europe and ahead of the fasting month," his spokesman, Yopie Hidayat, said quoting him to newsmen recently.