Annualized inflation slows down in August

The Jakarta Post, Jakarta

Annualized inflation in August slowed down compared to the previous month as a slower increase in the prices of basic food commodities, the largest contributor to inflation, put a brake on inflationary pressure.

The milder inflation should help ease pressure on Bank Indonesia to push interest rate up. A higher interest rate environment could impede the country's economic growth as bank loans to finance business and consumption activities become more expensive.

The Central Statistics Agency (BPS) announced on Wednesday that inflation as measured by the consumer price index (CPI) in August rose 6.67 percent from the same month last year, slower than the annualized inflation rate of 7.20 percent registered in July. Prices of all commodities and services increased particularly as the rupiah weakened against the U.S. dollar.

The weaker inflation added to the bullish sentiment in the stock market, where the Jakarta Stock Composite Index gained by 2.7 percent.

BPS said that on-month inflation in August grew 0.09 percent from the level in July mainly due to higher cost of housing and education. Prices of basic food commodities during the month, however, declined by 2.13 percent. No explanation was given for the decline.

Inflationary pressure has been on the rise during the past previous months particularly due to the weakening of the rupiah against the U.S. dollar, which made the cost of importing raw materials became more expensive, thus putting pressure on prices to move up. Indeed, the government has recently revised upward its inflation target for this year to 7 percent from the original forecast of 6.5 percent to better reflect the current development in the rupiah and rising international oil prices.

The rising inflation has weakened consumers purchasing power, which in fact contributed to a slowing down of economic growth during the second quarter as household consumption had been the main driver of the economy.

The slower economic growth has created a dilemma for the central bank as it struggles to push interest rate up in a bid to help curb inflationary pressure.

After keeping its benchmark interest rate unchanged at 7.37 percent two weeks ago, Bank Indonesia on Wednesday slightly increased the interest rate on one-month SBI promissory notes to 7.38 percent.

The interest rate on the three-month SBI notes was unchanged at 7.31 percent. An increase in the three-month rate would raise the burden of the government in servicing its huge domestic bonds, whose rates are linked with the three-month SBI notes.

Analysts forecast a year-end benchmark rate of not more than 8 percent.

Elsewhere, BPS said that the cost of education in August rose by 5.10 percent on-month mainly due to a rising school tuition fees at the start of the new school year.

Housing costs increased by 0.65 percent; transport and communications 0.40 percent; while prices of processed foods, beverages, tobacco and cigarettes rose 0.35 percent.