Inflation slows; Expected to rise again

Aditya Suharmoko , The Jakarta Post , Jakarta | Tue, 09/02/2008 10:23 AM | Business

Inflation slowed last month as latent effects of May's fuel price increases had fully dissipated by the end of July, the Central Statistics Agency (BPS) announced Monday.

The decrease in inflation may deter the central bank from increasing its benchmark interest rate for the fifth straight month.

The inflation rate in August increased by 0.51 percent, slower than the 1.37 percent increase in July.

August saw commodity prices increase at the lowest monthly rate since the beginning of the year, according to the agency.

According to the BPS, year-on-year inflation in August stood at 11.85 percent, slightly down from 11.9 percent in July. Inflation averaged 9.4 percent in the January to August period.

The BPS said increased spending on food and education were the biggest contributors to August inflation.

"The prices of fresh fish rose amid a supply shortage due to bad weather and a rise in the prices of fuels used by fishermen," BPS chairman Rusman Heriawan said.

The prices of chickens and eggs also rose due to a surge in the price of feed.

Spending on education rose in August from last month as parents paid school fees and bought school supplies, including books and uniforms as the new school semester kicked off.

Spending on education, recreation and sports shared the highest inflation rate of 1.36 percent, followed by food at 0.94 percent and processed food, tobacco and beverages at 0.59 percent.

Of 66 cities surveyed by the BPS, 60 registered inflation, with Mamuju, West Sulawesi, posting a rate of 3.21 percent, mostly due to flooding, while Pematangsiantar, North Sumatra, posted the lowest inflation rate -- 0.02 percent.

Bank BNI economist Ryan Kiryanto said August's fairly low inflation may be due to Bank Indonesia's (BI) lowering of its interest rate by 25 basis points in four consecutive months.

"I expect BI to maintain its rate at 9 percent (this month)," he said.

The government expects inflation to reach 11.2 percent by the end of the year, lower than the central bank's forecast of between 11.5 and 12.5 percent.

Rusman, however, warned that inflation might soar in September due to increased spending during the Islamic fasting month of Ramadan and Idul Fitri holiday, which falls Oct. 1.

"During the fasting month, there is always an increase in price expectations," he said.

Businesses tend to raise prices ahead of the Idul Fitri and Christmas holidays, when Indonesians traditionally increase spending as they travel more and receive more guests in the form of relatives and friends.

The government has said it expects inflation this month to be lower than in September 2007 on an expected abundant food supply. In September 2007, inflation stood at 0.8 percent.

However, Recapital Securities analyst Poltak Hotradero said the government might have difficulties in keeping this month's inflation below 0.8 percent as businesses tended to take advantage of strong spending during the month.

"Businesses will want to reap more profits at a time when people receive bonuses before the Idul Fitri holiday," Poltak said.

Poltak and Ryan forecast there will be more room for the central bank to raise its interest rates next month.

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