Inflation remains in check, August rate at 0.84%

The Jakarta Post, Jakarta

Inflation, as measured by the consumer price index (CPI), rose in August by 0.84 percent, bringing the rate for the first eight months of the year to 2.11 percent, the Central Statistics Agency (BPS) said on Monday.

BPS chairwoman Sudarti Soerbakti attributed the slight rise in inflation to the marginal increase in the prices of most basic commodities and services during the month.

The prices of food commodities rose by 0.15 percent in August, while the prices of housing, clothing and health care grew by 0.61 percent, 0.28 percent and 0.23 percent, respectively. Prices in the transportation and telecommunications sectors increased by 0.09 percent.

The education, recreation and sports sector recorded the largest price increase of 7.82 percent in August, largely the result of a rise in demand for education-related products ahead of the new school year.

Despite the increase, however, Indonesia is still keeping inflation in check.

The 2.11 percent inflation posted as of August is below the government's full-year target of 9 percent, as stated on the 2003 state budget.

Bank Indonesia has predicted inflation will reach 6 percent at the highest by the end of the year.

Theoretically, low inflation will strengthen the public's purchasing power. This will in turn boost domestic consumption, which has been the main driver of the country's economic growth over the past three years.

Also, a relatively mild inflation rate would pave the way for Bank Indonesia to continue cutting its benchmark interest rate, which is already at a historic low. This would push banks to lower their lending rates.

The interest rate on Bank Indonesia's one-month SBI promissory note currently stands at 8.91 percent, compared to about 13 percent early this year. Many analysts have said the SBI rate could fall even further.

With year-on-year inflation at just 6.38 percent in August, optimisms is high that Bank Indonesia will continue to cut its benchmark rate.

A low SBI rate is seen as beneficial for the economy. Not only will it save trillions of rupiah of state funds the government has to pay in servicing its domestic debts, it also will force banks to lower the interest rates of commercial lendings for the private sector.

According to one estimate, a 1 percent decline in the SBI rate could save up to Rp 2 trillion allocated to pay the interest of recapitalization bonds the government issued in the aftermath of the economic crisis. Most of the recap bonds' interest rates are tied to the movement of the SBI rate.

While predicting strong inflationary pressure in the period leading up to the end of the year, the BPS remains optimistic the inflation rate for the year will not exceed single digits.

Prices normally go up at the end of the year due to a rise in demand for goods for religious celebrations.

Inflation Rates ---------------------------------------------------

2001 2002 2003 --------------------------------------------------- 1. August (on-month) -0.21% 0.29% 0.84% 2. January-August 7.48% 5.61% 2.11% 3. August (on-year) 12.23% 10.60% 6.38% --------------------------------------------------- Source: BPS