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Cablegate: Inflation Surges On Higher Food and Utilities

VZCZCXRO9809
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1082 1550948
ZNR UUUUU ZZH
R 030948Z JUN 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 9182
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2056
RUEHBJ/AMEMBASSY BEIJING 5102
RUEHBY/AMEMBASSY CANBERRA 2593
RUEHUL/AMEMBASSY SEOUL 4645
RUEAIIA/CIA WASHDC

UNCLAS JAKARTA 001082

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SETH SEARLS
COMMERCE FOR 4430/KELLY
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
USTR WEISEL, EHLERS

E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: INFLATION SURGES ON HIGHER FOOD AND UTILITIES

REF: A) Jakarta 1007 B) Jakarta 1033

1. (SBU) Summary. Indonesia's headline inflation rate jumped to
10.4% (y-o-y) in May, the highest rate since September 2006. Rises
in food, housing, utility and transportation prices drove the
overall increase. Core inflation increased to 8.7% (y-o-y) in May
up from 8.2% in April, suggesting that higher food and fuel prices
are slowly starting to impact other products. Analysts expect
further increases in inflation in June, since the full impact of the
fuel price hikes is not captured in the May data. Rising prices
continue to put pressure on poor households and complicate economic
decision making in Indonesia. End Summary.

Inflation Soars on Food, Housing and Utilities
--------------------------------------------- -

2. (U) Indonesia's headline inflation rate jumped 1.4% (m-o-m)
bringing the y-o-y inflation rate 10.4%, the highest rate since
September 2006. Increases in food, housing, utility and
transportation prices drove the overall rate of inflation. The
rapid increase surprised most analysts, given that Indonesian food
prices often decline from April to May in line with the harvest
season, according to a J.P. Morgan report. Food prices have
increased 5.5% year-to-date and 18.2% from May 2007. The rapid rise
in food, housing and transportation costs will exacerbate already
waning consumer confidence and place significant strain to poor
household budgets (ref A).

3. (U) Core inflation (which excludes volatile categories such as
food and energy) increased to 8.7% (y-o-y) in May up from 8.2% in
April, suggesting that higher food and fuel prices are slowly
starting to impact other goods. Given that the May price data do
not include the full impact of the increase in subsidized fuel
prices, which occurred in late May, analysts expect inflation to
accelerate further in June. Transportation costs, which rose 2.1%
(m-o-m) in May, are expected rise by 15-30% in June, in response to
fuel price hikes.

Tough Policy Decisions Ahead
-----------------------------

4. (SBU) If food and oil prices remain high or climb further,
Indonesia's monetary policymakers will face an increasingly
difficult decision making environment. Most analysts expect the
central bank to react swiftly to the new price data by raising
interest rates by as much as 50 basis points later this week.
During a donor's briefing in Jakarta, IMF representatives also
expressed confidence in the central bank's commitment to fight
inflation. Yet, some analysts assert that Indonesia delayed
interest rate hikes for too long, and that the central bank will
need to raise rates dramatically in the coming months to regain
control over inflation. Other analysts worry that aggressive
monetary tightening will significantly slow economic growth while
doing little to control inflation, which has been driven by external
forces.

5. (SBU) High global food and fuel prices will also continue to
create difficult fiscal decisions for the government. If global oil
prices remain at or near current levels, pressure on government
finances and smuggling should remain at manageable levels. Higher
global food and oil prices would put renewed pressure on the budget,
re-ignite smuggling, and exacerbate domestic inflation (ref B).
Higher inflation rates would also dilute the effectiveness of the
governments cash transfer program and other pro-poor programs in
advance of the 2009 election. Even at current oil prices, the
government's ability to expand social and development spending is
limited. Yet, the IMF estimates that every $1 increase in the
global price of fuel will raise the fuel subsidy bill by Rp 2-3
trillion. If world oil prices increase to $150 per barrel, the fuel
and electricity subsidy bill could exceed 25% of the budget.

HEFFERN

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