Increased prices raise concerns of hike in interest

Dadan Wijaksana, Jakarta

The Central Statistics Agency (BPS) reported on Monday that the prices of imported foods and housing rent edged up in July, and coupled with higher education costs, helped to push inflation up by 0.39 percent from the previous month.

"The decline in rupiah contributed in part to the inflation in July, as it pushed up prices of imported foods, although the higher education costs was more attributable to the new school year," BPS chairman Choiril Maksum said while presenting the agency's monthly reports on inflation and trade figures.

The rupiah has suffered from various external and internal shocks throughout the year, falling from Rp 8,400 to the dollar at the start of the year to around Rp 9,150 in July. The currency stands among the worst in Asia.

Aside from causing a direct impact on the price of imported goods, the shaky rupiah also affected production costs, as many companies remain dependent on imported raw materials.

Other factors in the consumer price index (CPI) that also contributed to the overall inflation were: processed foods, beverages and tobacco at 0.04 percent; clothing at 0.01 percent and health care at 0.01 percent.

The BPS also said July's annualized inflation stood at 7.2 percent, compared to 6.83 in June, creating worries that the government's full-year target of 6.5 percent would not be met, particularly due to soaring oil prices and the rupiah's volatility.

As of July, cumulative inflation stands at 3.39 percent.

Stronger inflationary pressure could force the central bank to start raising interest rates, especially as the U.S. is also increasing its rates.

Bank Indonesia, however, which has been keeping the rate relatively low, said it was unlikely to follow the U.S.' move, because raising domestic rates would make lending more expensive and thus, hurt the prospects of economic growth.

On the other hand, a mild inflation would help maintain the people's purchasing power, which is vital in keeping domestic consumption robust. Domestic consumption has been the main engine of economic growth for the past few years.