Against the odds, govt sees decline in inflation

Rendi A. Witular and Urip Hudiono, The Jakarta Post/Jakarta

Challenging mainstream predictions, the government is upbeat that inflationary pressure will soon ease down, betting on its planned efforts to keep the prices of goods at bay, by ensuring stocks of goods and oil-based fuels, as well as stabilizing the rupiah.

Vice President Jusuf Kalla said on Monday the current high inflation environment was just a temporary impact from the rise in fuel prices on Oct. 1, which had created a one-shoot effect in transportation costs.

However, "we are optimistic the inflation rate will decline this month. It's possible because we've prepared several programs to secure supplies of goods and fuel, as well as stabilizing the rupiah," said Kalla after a gathering.

Kalla, a former tycoon with several business flagships such as the Hadji Kalla Group and the Bukaka Group, did not say how such efforts would be carried out.

The Central Statistics Agency (BPS) reported last week that the fuel price increases of 126.6 percent on average had caused the country's Consumer Price Index to rise by 8.7 percent in October from September, or up 17.89 percent from October last year.

Accumulatively, inflation had reached 15.65 percent as of October -- a slap in the face for the government, which, via the Coordinating Minister for the Economy Aburizal Bakrie, had predicted the fuel price increases would only push on-year inflation to 12 percent.

It remains to be seen whether the government's predictions on Monday will this time ring true.

Observers believe the worsening economic situation will put more pressure on the beleaguered economics team amid lingering suggestions of a Cabinet reshuffle. President Susilo Bambang Yudhoyono is now reviewing the performance of all ministers, including his under-fire economics team, slated for completion later this month.

BNI Securities head of research, Adrian Rusmana, doubted that inflation would go down anytime soon, saying that the high inflation environment would likely prevail until the first quarter of next year on stronger expectations of further increases in the prices of goods and services.

"I would say that the inflation level will remain high until next year's first quarter. But it will ease by the end of the second quarter," said Adrian, without giving any estimation.

Adrian said among primary drivers would be concerns among the public and business community of a possible rise in power rates next year, which could trigger an even higher production cost.

The high inflation would consistently push up key interest rates, which would eventually slow down business activities, apart from causing a slump in the capital market.

The country's banking industry will also suffer a severe blow since there will be a decline in lending expansion and a rise in non-performing loans (NPLs).

"Even with a low-interest-rate environment, banks are already facing difficulties in expanding their loans because the public's purchasing power and the financial capability of the corporate sector have declined due to the high inflation," said Adrian.