NDEP Inflation Review June 2014 Final
N AT IO N AL D I R EC TO R ATE
FOR ECONOMIC POLICY
QUA RTE R LY IN FL ATI O N
R E V I EW
JUNE 2014
n.10
EXECUTIVE SUMMARY
In June 2014 the year-on-year inflation rate in Timor-Leste was -0.6%. This means that on average the prices
of goods and services in Timor-Leste were lower in June 2014 than June 2013 and that inflation is below the
SDP target range of 4% to 6% per annum.
The largest decreases in prices over the 12 months before June 2014 were in the food and non-alcoholic
beverages (-1.2%) and communication (-6.3%) categories. Food and non-alcoholic beverages account for
64% of the CPI basket and the fall in prices in this category has had a significant impact on the overall rate of
inflation.
From May 2013 to May 2014 the USD appreciated against a weighted basket of currencies from TimorLeste’s ajor tradi g part ers a d i ter atio al food prices fell. These two external factors have placed
downward pressure on inflation and partly explain the fall in prices from June 2013 to June 2014. Increased
competition in the telecoms industry has also contributed to falling prices. Other domestic supply side
factors, particularly agricultural production, may have contributed to falling domestic prices and need to be
further analyzed.
Page 1 of 5
TRENDS IN INFLATION
Year-on-year inflation in Timor-Leste fell to -0.6% in June 2014 (see graph 1). This demonstrates that prices
of goods and services in Timor-Leste were lower in June 2014 than they were in June 2013. The year-on-year
rate of inflation has been sharply falling every quarter since June 2013 and is now well below the SDP target
range of 4% to 6%.
The year-on-year inflation rates in June 2014 were -0.7% and -0.2% in Dili and the districts respectively. This
shows the fall in prices in goods and services over the last year occurred throughout Timor-Leste but was
largest in Dili.
The fall in year-on-year inflation in Timor-Leste was driven by sharp decreases in prices in May and June of
2014 (see graph 2). It is likely that non-seasonal factors are driving this price deflation, as the decline in
prices is more severe than the seasonal slowdown traditionally seen around June each year.
The CPI basket in Timor-Leste consists of 10 categories of goods and services (see graph 3). There were falls
in prices in the following three categories from June 2013 to June 2014:
food and non-alcoholic beverages
furnishing, household equipment and routine household maintenance
communication
The food and non-alcoholic beverages category, with a weight of 64%, represents a large proportion of the
CPI basket. The fall in this category drove the overall fall in prices from June 2013 to June 2014.
Five categories (clothing and footwear, housing, health, transport and education) saw small increases in
prices of less than 2% from June 2013 to June 2014. Prices in the two remaining categories (alcohol and
tobacco and recreation and culture) significantly increased by over 6%.
CONSEQUENCES OF INFL ATION
High inflation can increase costs for businesses and may reduce living standards if prices increase faster than
household income. The recent low inflation in year-on-year prices in Timor-Leste may therefore contribute
to higher living standards and increase competiveness. Many poor household spend a large proportion of
their income purchasing food and falling prices in this category may therefore contribute to poverty
reduction. The fall in communication prices may have reduced costs for Timorese businesses and increased
their competiveness.
CAUSES OF INFLATION
Inflation is affected by both international and domestic factors.
Page 2 of 5
International Causes of Inflation
This review examines exchange rates from May 2013 to May 2014 as this variable likely affects domestic
inflation with a slight lag.
From May 2013 to May 2014 the Nominal Effective Exchange Rate increased by 8.9% (see graph 4). This
means that the USD appreciated against a weighted (by value of imported goods) basket of currencies from
Timor-Leste’s ai tradi g part ers. This appreciation was driven by the USD strengthening against the
Indonesian Rupee and has placed downward pressure on the prices of imports and inflation in Timor-Leste.
The USD also appreciated by 1.1% and 9.5% against the Vietnam Dong and Thai Baht respectively from May
2013 to May 2014. Rice is imported from these two countries and the appreciation of the USD against their
currencies may have placed downward pressure on its price in Timor-Leste. Rice has a high weighting in the
CPI basket and therefore changes in its price have a significant impact on the overall rate of inflation.
International food prices also fell slightly from May 2013 to May 2014. This has likely underpinned the fall in
food prices in Timor-Leste. International food prices have steeply declined since March 2014 slightly
proceeding the sharp decline in food prices in Timor-Leste.
Domestic Causes of Inflation
Since the ending of Timor-Telecom's monopoly, competition has increased in the telecommunication sector.
This probably contributed to the fall in prices in this category from June 2013 to June 2014.
Domestic agricultural production is also likely to affect inflation in Timor-Leste. Analysis of this relationship
is, however, constrained by the lack of quarterly or monthly data on agricultural production.
Government recurrent expenditure is also likely to affect inflation in Timor-Leste and this determinant will
be analyzed in greater detail in the next quarterly inflation review.
INFLATION PROSPECT
Going forward year-on-year inflation is likely to remain low (but may slightly increase from -0.6%) because:
International food prices fell in June and July of 2014 and are not expected to sharply increase this year
The USD continued to appreciate against the Indonesian Rupee in June, July and August 2014
Higher budget execution may place upward pressure on inflation, but given the aforementioned factors is
unlikely to result in a high overall level of inflation.
Page 3 of 5
Graph 3: Percentage Change by CPI Category June 2013 to June 2014
Graph 1: Timor-Leste Year-on-Year Inflation
10%
18%
16%
8%
14%
6%
12%
4%
10%
2%
8%
0%
6%
-2%
4%
2%
-4%
0%
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
-6%
-2%
-8%
Graph 4: Nominal Effective Exchange Rates Index May 2013 to May 2014
Graph 2: Timor-Leste CPI Index
110
104.6
108
104.4
106
104.2
104
104.0
102
103.8
100
103.6
98
103.4
96
94
103.2
92
103.0
90
May-13
102.8
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
NEER
Jun-14
Page 4 of 5
Nov-13
Dec-13
Thailand and Vietnam NEER
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Graph 5: FAO Food Prices Index
120
118
116
114
112
110
108
106
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Page 5 of 5
FOR ECONOMIC POLICY
QUA RTE R LY IN FL ATI O N
R E V I EW
JUNE 2014
n.10
EXECUTIVE SUMMARY
In June 2014 the year-on-year inflation rate in Timor-Leste was -0.6%. This means that on average the prices
of goods and services in Timor-Leste were lower in June 2014 than June 2013 and that inflation is below the
SDP target range of 4% to 6% per annum.
The largest decreases in prices over the 12 months before June 2014 were in the food and non-alcoholic
beverages (-1.2%) and communication (-6.3%) categories. Food and non-alcoholic beverages account for
64% of the CPI basket and the fall in prices in this category has had a significant impact on the overall rate of
inflation.
From May 2013 to May 2014 the USD appreciated against a weighted basket of currencies from TimorLeste’s ajor tradi g part ers a d i ter atio al food prices fell. These two external factors have placed
downward pressure on inflation and partly explain the fall in prices from June 2013 to June 2014. Increased
competition in the telecoms industry has also contributed to falling prices. Other domestic supply side
factors, particularly agricultural production, may have contributed to falling domestic prices and need to be
further analyzed.
Page 1 of 5
TRENDS IN INFLATION
Year-on-year inflation in Timor-Leste fell to -0.6% in June 2014 (see graph 1). This demonstrates that prices
of goods and services in Timor-Leste were lower in June 2014 than they were in June 2013. The year-on-year
rate of inflation has been sharply falling every quarter since June 2013 and is now well below the SDP target
range of 4% to 6%.
The year-on-year inflation rates in June 2014 were -0.7% and -0.2% in Dili and the districts respectively. This
shows the fall in prices in goods and services over the last year occurred throughout Timor-Leste but was
largest in Dili.
The fall in year-on-year inflation in Timor-Leste was driven by sharp decreases in prices in May and June of
2014 (see graph 2). It is likely that non-seasonal factors are driving this price deflation, as the decline in
prices is more severe than the seasonal slowdown traditionally seen around June each year.
The CPI basket in Timor-Leste consists of 10 categories of goods and services (see graph 3). There were falls
in prices in the following three categories from June 2013 to June 2014:
food and non-alcoholic beverages
furnishing, household equipment and routine household maintenance
communication
The food and non-alcoholic beverages category, with a weight of 64%, represents a large proportion of the
CPI basket. The fall in this category drove the overall fall in prices from June 2013 to June 2014.
Five categories (clothing and footwear, housing, health, transport and education) saw small increases in
prices of less than 2% from June 2013 to June 2014. Prices in the two remaining categories (alcohol and
tobacco and recreation and culture) significantly increased by over 6%.
CONSEQUENCES OF INFL ATION
High inflation can increase costs for businesses and may reduce living standards if prices increase faster than
household income. The recent low inflation in year-on-year prices in Timor-Leste may therefore contribute
to higher living standards and increase competiveness. Many poor household spend a large proportion of
their income purchasing food and falling prices in this category may therefore contribute to poverty
reduction. The fall in communication prices may have reduced costs for Timorese businesses and increased
their competiveness.
CAUSES OF INFLATION
Inflation is affected by both international and domestic factors.
Page 2 of 5
International Causes of Inflation
This review examines exchange rates from May 2013 to May 2014 as this variable likely affects domestic
inflation with a slight lag.
From May 2013 to May 2014 the Nominal Effective Exchange Rate increased by 8.9% (see graph 4). This
means that the USD appreciated against a weighted (by value of imported goods) basket of currencies from
Timor-Leste’s ai tradi g part ers. This appreciation was driven by the USD strengthening against the
Indonesian Rupee and has placed downward pressure on the prices of imports and inflation in Timor-Leste.
The USD also appreciated by 1.1% and 9.5% against the Vietnam Dong and Thai Baht respectively from May
2013 to May 2014. Rice is imported from these two countries and the appreciation of the USD against their
currencies may have placed downward pressure on its price in Timor-Leste. Rice has a high weighting in the
CPI basket and therefore changes in its price have a significant impact on the overall rate of inflation.
International food prices also fell slightly from May 2013 to May 2014. This has likely underpinned the fall in
food prices in Timor-Leste. International food prices have steeply declined since March 2014 slightly
proceeding the sharp decline in food prices in Timor-Leste.
Domestic Causes of Inflation
Since the ending of Timor-Telecom's monopoly, competition has increased in the telecommunication sector.
This probably contributed to the fall in prices in this category from June 2013 to June 2014.
Domestic agricultural production is also likely to affect inflation in Timor-Leste. Analysis of this relationship
is, however, constrained by the lack of quarterly or monthly data on agricultural production.
Government recurrent expenditure is also likely to affect inflation in Timor-Leste and this determinant will
be analyzed in greater detail in the next quarterly inflation review.
INFLATION PROSPECT
Going forward year-on-year inflation is likely to remain low (but may slightly increase from -0.6%) because:
International food prices fell in June and July of 2014 and are not expected to sharply increase this year
The USD continued to appreciate against the Indonesian Rupee in June, July and August 2014
Higher budget execution may place upward pressure on inflation, but given the aforementioned factors is
unlikely to result in a high overall level of inflation.
Page 3 of 5
Graph 3: Percentage Change by CPI Category June 2013 to June 2014
Graph 1: Timor-Leste Year-on-Year Inflation
10%
18%
16%
8%
14%
6%
12%
4%
10%
2%
8%
0%
6%
-2%
4%
2%
-4%
0%
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
-6%
-2%
-8%
Graph 4: Nominal Effective Exchange Rates Index May 2013 to May 2014
Graph 2: Timor-Leste CPI Index
110
104.6
108
104.4
106
104.2
104
104.0
102
103.8
100
103.6
98
103.4
96
94
103.2
92
103.0
90
May-13
102.8
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
NEER
Jun-14
Page 4 of 5
Nov-13
Dec-13
Thailand and Vietnam NEER
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Graph 5: FAO Food Prices Index
120
118
116
114
112
110
108
106
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Page 5 of 5