Inflation Report (Consumer Price Index)

Based on Year on Year Measurement

Month / Year February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007

Inflation 6.84 % 7.02 % 6.96 % 6.33 % 5.67 % 5.80 % 6.44 % 6.22 % 5.05 % 4.16 % 3.91 % 3.43 % 3.81 % 3.72 % 2.78 % 2.41 % 2.57 % 2.83 % 2.75 % 2.71 % 3.65 % 6.04 % 7.31 % 7.92 % 8.60 % 9.17 % 11.06 % 11.68 % 11.77 % 12.14 % 11.85 % 11.90 % 11.03 % 10.38 % 8.96 % 8.17 % 7.40 % 7.36 % 6.59 %

November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 2006 May 2006 April 2006 March 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005 July 2005 June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004 May 2004 April 2004 March 2004

6.71 % 6.88 % 6.95 % 6.51 % 6.06 % 5.77 % 6.01 % 6.29 % 6.52 % 6.30 % 6.26 % 6.60 % 5.27 % 6.29 % 14.55 % 14.90 % 15.15 % 15.53 % 15.60 % 15.40 % 15.74 % 17.92 % 17.03 % 17.11 % 18.38 % 17.89 % 9.06 % 8.33 % 7.84 % 7.42 % 7.40 % 8.12 % 8.81 % 7.15 % 7.32 % 6.40 % 6.18 % 6.22 % 6.27 % 6.67 % 7.20 % 6.83 % 6.47 % 5.92 % 5.11 %

February 2004 January 2004 December 2003 November 2003 October 2003 September 2003 August 2003 July 2003 June 2003 May 2003 April 2003 March 2003 February 2003 January 2003

4.60 % 4.82 % 5.16 % 5.53 % 6.48 % 6.33 % 6.51 % 6.27 % 6.98 % 7.15 % 7.62 % 7.17 % 7.60 % 8.68 %

Introduction to Inflation Definition to Inflation I Disaggregation of Inflation I Important of Price Stability

In simple terms, inflation is understood as a persistent, ongoing rise across a broad spectrum of prices. An increase in prices for one or two goods alone cannot be described as inflation unless that increase spreads to (or leads to escalating prices for) other goods. The reverse of inflation is deflation. The indicator commonly used to measure the level of inflation is the Consumer Price Index (CPI). Changes in the CPI over time are indicative of price movements for packages of goods and services consumed by the public. Since July 2008, the packages of goods and services in the CPI basket have been based on the 2007 Cost of Living Survey conducted by the Statistics Indonesia (BPS). Following this, BPS monitors price movements for these goods and services in selected cities and towns each month, using information from traditional markets and modern retail outlets on specific categories of goods and services in each location. Other inflation indicators used in international best practice include:

1.

2.

Wholesale Price Index. The wholesale price for a commodity is the price of transactions taking place between the first wholesaler and the next largest trader for large quantities on the first market for a commodity. [More detailed explanations of the Wholesale Price Index can be found at the Statistics Indonesia (BPS) website:http://dds.bps.go.id/eng/] The Gross Domestic Product (GDP) Deflator illustrates the measurement of price levels for the final goods and services produced within an economy. The GDP Deflator is derived by dividing GDP based on nominal prices by GDP based on constant prices.

Categorisation of Inflation The inflation measured in the CPI in Indonesia is divided into 7 expenditure categories (based on the Classification of Individual Consumption by Purpose - COICOP). These are: 1. 2. 3. 4. 5. 6. 7. Food Stuffs Processed Foods, Beverages and Tobacco Housing Clothing Health Education and Sports and Transportation and Communications.

In addition to the COICOP classifications, BPS now publishes inflation figures based on other classifications known as disaggregation of inflation. This disaggregation is performed by generating an inflation indicator more illustrative of the influence of fundamentals. In Indonesia, CPI inflation is disaggregated into: 1. Core Inflation, i.e. the persistent component within inflation movement, influenced by fundamentals such as: o Supply-demand interaction o External environment: exchange rate, international commodity prices, trading partner inflation o Trader and consumer expectations of inflation. Non-Core Inflation, i.e. the inflation component marked by volatility due to the influence of nonfundamentals. The non-core components of inflation are: o Volatile Foods: Inflation predominantly influenced by shocks in the food stuffs category, such as harvests, disruptions from natural events or movements in domestic food commodity prices and international food commodity prices. o Administered Prices: Inflation predominantly influenced by shocks from government-announced prices, such as for subsidised fuels, electricity billing rates, transport fares and so on.

2.

Inflation Determinants Inflation arises from pressures on the supply side (cost push inflation), on the demand side (demand pull inflation) and inflation expectations. Factors driving cost push inflation arise from exchange rate depreciation, the impact of inflation in foreign countries and especially trading partners, increases in administered prices1 and negative supply shocks2 brought about by natural disasters and disruptions to distribution. Demand pull inflation is driven by high demand for goods and services relative to supply. Within the macroeconomic context, this condition is illustrated by real output in excess of potential output or aggregate demand beyond the capacity of the economy. On the other hand, the inflation expectations factor is influenced by the behaviour of the public and economic actors in applying expected inflation figures in their economic activities. These inflation expectations may tend to be adaptive or forward looking. Reflecting this is the price forming behaviour at the producer and trader levels, especially in the

period leading up to major religious festivities (Eid-ul-Fitr, Christmas and New Year) and when new rulings are issued on the regional minimum wage. Although the general availability of goods is seen as adequate to cope with increased demand, prices of goods and services at times of religious festivities mount beyond the levels explained by the supply-demand condition. Similarly, when new rulings are issued on the regional minimum wage, traders also raise prices even though the wage increase has only modest significance in fuelling increased demand.

Stable inflation is a prerequisite for the sustainable economic growth that will ultimately bring benefits through improvements in public welfare. The importance of inflation control is based on the reasoning that high, unstable inflation will have negative impact on the social and economic condition of the people. First, high inflation will lead to steady erosion of people's real incomes and deterioration in living standards so that all members of society and especially the poor sink into deeper poverty. Second, unstable inflation will create uncertainty for economic actors, affecting their ability to make decisions. Empirical experience shows that unstable inflation will create added difficulty for the public in their decisions regarding consumption, investment and production, which in turn will hamper economic growth. Third, a higher level of domestic inflation in comparison to neighbouring countries will make domestic interest rates uncompetitive, which may lead to pressure on the rupiah exchange rate.