Indonesia consumer prices rise more than expected

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Indonesian consumer prices rose more than expected last month as south-east Asia?s largest economy continued to struggle to digest October?s 126 per cent increase in fuel prices.

January?s inflation rate was an annualised 17.03 per cent, down marginally from 17.1 per cent in December. The official statistics agency said the biggest contributor to price rises had come from food, particularly rice.

The data mean President Susilo Bambang Yudhoyono?s government will come under added pressure to deliver on a stalled $150bn, five-year infrastructure spending programme.

It also comes as some economists warn Indonesia risks slipping into the local equivalent of stagflation ? persistent high unemployment and inflation combined with low economic growth.

Indonesia?s struggle with inflation highlights a major issue confronting Mr Yudhoyono and the economic team he swore in just eight weeks ago, especially if it wants to see through its promises of higher growth and foreign investment, economists said.

The local currency, the rupiah, has touched 11-month highs against the US dollar in recent weeks while the Jakarta Stock Exchange has surged to new records thanks to an inflow of foreign portfolio investment.

But the measures of confidence mask a more awkward reality for Mr Yudhoyono?s government, which last year promised a package of infrastructure investment and is expected to soon unveil a white paper setting out its policy priorities.

If the central bank continues raising its benchmark interest rate ? now 12.75 per cent ? to battle inflation, it would be likely to slow growth. Economists have begun predicting a slowdown to 4-5 per cent growth this year against the government?s 6.1 per cent forecast.

The only antidote, economists argue, would be an increase in government spending and a concerted effort to implement the stalled infrastructure spending programme.

Adding to inflationary concerns is an expected increase in electricity prices this year of at least 30 per cent as part of efforts to unwind Suharto-era subsidies. The Indonesian Bureau of Statistics said an increase of 40 per cent in electricity prices would add a full percentage point to inflation.

The consequences of mishandling the situation would be significant, economists warn. Goldman Sachs? Adam Le Mesurier said in a recent report that ?policy complacency? was reappearing and asked if a local variant of stagflation was looming.

Economists said 4-5 per cent economic growth eq-uates to Indonesia?s economy standing still. GDP, they point out, needs to grow by 6-7 per cent annually to create enough jobs to keep up with new entrants into the workforce. The official unemployment rate sits just above 10 per cent.

Additional reporting by Taufan Hidayat

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