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