General inflation increased to 2,75% (yoy) in February 2024 following an increase in food prices due to a combination of pressure from the demand and production sides. The increasing intensity of El-Nino disrupts the adequate supply of food commodities, while the Ramadan period causes an increase in demand for food commodities. Furthermore, the unexpected rise in US inflation sparked sentiment that the Fed needed to postpone reducing its benchmark interest rate from its highest point in the last 23 years. This condition is quite influential in the occurrence of capital outflows from the Indonesian bond market. Despite the high pressure on the Rupiah, in the last few weeks the movement of the Rupiah has tended to be stable. So, we are of the view that BI needs to hold its benchmark interest rate at 6,00%.
The Importance of Controlling Food Prices
General inflation jumped to 2,75% (yoy) in the second month of 2024, a significant increase from 2,57% (yoy) in January 2024. Movements in food prices have been the main driving factor for inflation in the last five months, following widespread crop failures due to increasing intensity of the impact of the natural phenomenon, namely El-Nino. Because the food component is the largest contributor to inflation calculations, maintaining food prices has become the main issue in controlling inflation recently. Since last September, the Nino Index has reached levels above 0,5 (indicating the occurrence of El-Nino) and is currently at 1,80. The ongoing El-Nino phenomenon has triggered the postponement of the harvest season and disrupted adequate rice supplies. Furthermore, the momentum of Ramadan causes an increase in demand for food products, including rice. The combination of supply shortages and increased demand for food commodities pushed food inflation up to 6,73% (yoy) in February 2024 from 5,84% (yoy) in the previous month.
