December deflation a result of lower fuel prices

Mustaqim Adamrah ,  The Jakarta Post ,  Jakarta   |  Tue, 01/06/2009 11:09 AM  |  Headlines

A decline in the costs of transportation, communications and financial services has sent the monthly consumer price index (CPI) into negative territory, giving the central bank more room to further cut its benchmark interest rate.

On Monday, the Central Statistics Agency (BPS) announced 0.04 percent deflation was recorded in December -- exactly the same as in December 2005 -- after price indices in the three sectors dropped by 2.74 percent.

The deflation consequently locked the full-year inflation rate at 11.06 percent, higher than the 6.59 percent recorded in the same period last year, but still lower than the inflation target of between 11.5 percent and 12.5 percent.

Ali Rosidi, BPS deputy head for distribution and service sector statistics, said administered prices resulting from government policies, but not from those determined by the market, had contributed to the deflation.

"The deflation was largely due to the government's policy in cutting fuel prices, particularly the price of *subsidized* Premium gasoline, twice in December," he said.

He said some transportation service providers had since lowered their fares accordingly.

The government lowered the price of Premium from Rp 6,000 (54 US cents) per liter to Rp 5,500 on Dec. 1, and then to Rp 5,000 on Dec. 15 on declining global crude oil prices.

The government also slashed the price of subsidized diesel on Dec. 15, from Rp 5,500 per liter to Rp 4,800 -- a cut of 12.7 percent.

Ali also said deflation might continue this month if fuel prices declined any further.

Apart from administered prices, core inflation -- goods and services inflation influenced by the economy in general -- was recorded at 0.42 percent in December, contributing 65.99 percent to total inflation.

With the easing inflation, analysts say Bank Indonesia is likely to trim its interest rate after a Dec. 4 cut for the first time in a year by a quarter percentage point to 9.25 percent.

BI is shifting its focus to economic expansion and expects domestic demand to lead growth, contrary to a previous strategy in which it tried to maintain stability in key macroeconomic indicators at the cost of slowing corporate activities.

Ali said the exorbitant BI rate had deterred banks from lowering their interest rates for loans, currently running at between 14.5 percent and 15 percent.

"With inflation easing, the authority *BI* must lower its key rate. Otherwise the economy will be hard pressed to grow more than 6 percent this year," Ali said.

The government has set an economic growth target of 6 percent in 2009, with an inflation target of 6.5 to 7.5 percent.

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.