Easing prices signal consumer confidence

Subsiding concerns on a possible hike in subsidized-fuel prices are likely behind the easing of Indonesia’s year-on-year inflation rate in May, top officials say.

The year-on-year consumer-price index (CPI) declined slightly to 4.45 percent in May from 4.5 percent in April, the first drop in three months, the Central Statistics Agency (BPS) announced.

Finance Minister Agus Martowardojo and Bank Indonesia (BI) governor Darmin Nasution said easing inflation showed consumer confidence that there would be no subsidized-fuel price hike after the House of Representatives blocked a plan from the government in April.

Darmin told reporters after the data announcement on Friday that the dip meant that “expectations on fuel-price hikes have been low, so we are seeing this year’s inflation to be on the track of what we have predicted,”

The central bank previously forecast Indonesia’s inflation rate would range from 3.5 to 5.5 percent throughout the year, while Darmin predicted it would likely end up at about 4.5 percent.

“Hopefully, we can maintain this situation so that we can achieve our targeted inflation rate this year, which is below 5 percent,” Agus said.

The source of inflation might be shifting from subsidized-fuel price hike concerns to the weakening of rupiah, which might lead to an increase in the prices of imported products, according to another
official.

“As of now, the impact of imported inflation remains unseen. We can only tell whether the weakening rupiah has a significant effect on inflation in June,” BPS price statistics director Sasmito Hadi Wibowo said.

The rupiah has been under heavy selling pressure throughout the year, having weakened about 4 percent so far in 2012, of which 2.9 percent happened in May.

The drop has been attributed to foreign investors, who have dumped Indonesian assets to shift to safer US dollars on fears that the global economic recovery might stall due to the contagious Eurozone debt crisis and slowing economic growth in China and India.

In May, which saw a 0.07 percent increase in the monthly CPI, Indonesian inflation was fueled by rising prices for food, beverages, cigarettes and tobacco commodities - which rose 0.4 percent in aggregate, according to the BPS.

Sasmito called May’s monthly inflation rate “low” compared with 0.12 percent inflation in the same period in 2011 and over 1 percent in 2010.

“In the latest survey, consumers said they expected inflationary pressures to ease slightly over the next six months,” Danareksa Research Institute wrote in a report published on Friday.

Fewer consumers, 90.8 percent of those surveyed in May, expected general prices to increase, versus 91.8 percent who expected an increase in April, the report said.

The survey also reported an increase in consumer confidence, which rose “sharply” by 9.5 percent to 91.3 in May, up from 83.4 in April.

“Declining concerns were attributable to, among other things, a Reduced chance of a subsidized-fuel price increase. Fuel-price increases usually push up the price of goods, including foodstuffs, significantly,” Danareksa Research Institute said.

BI will likely keep its benchmark interest rate steady at a historic low of 5.75 percent at its next policy meeting, given that increased consumer confidence may not require monetary policy shifts to keep
prices stable.