Inflation softens in September

The Jakarta Post/Jakarta

Inflationary pressure eased in September due mainly to lower prices of basic food commodities and a relatively stable rupiah during most part of the month, the Central Statistics Agency (BPS) reported on Friday.

Inflation as measured by the consumer price index (CPI) during September rose by 6.27 percent from the level in the same month of last year. This was lower than the year-on-year inflation rate of 6.7 percent recorded in August.

The prices of basic food commodities -- the largest weighting in CPI -- fell 1.36 percent during the month to keep the overall prices in check. Consequently, inflation rose only by 0.02 percent from the level in August.

BPS chairman Choiril Maksum told a press gathering that the lower food prices was partly attributed to an abundant supply of rice, the most consumed-basic food commodity in the country.

"It helped offset the impact of households' larger education spending of the new school-year," Choiril said.

The costs of education, recreation and sports were up 2.02 percent in September.

The decline in inflationary pressure in September -- the second decline after inflation peaked a 15-month high of 7.2 percent in July, which exceeded the government's initial inflation target of 6.5 percent for this year, should ease pressure for the central bank in raising its benchmark rate.

A higher interest rate environment is feared to have negative impact on economic growth and also increase the burden of the government in servicing its huge domestic debts. The lower interest rate is expected to make bank loans cheaper to finance corporate activities and push economic growth higher this year to 4.8 percent as projected by the government.

For the past couple of years, Bank Indonesia has been aggressively cutting down its benchmark rate, now standing at a historic low of 7.39 percent.

Many in the financial market have recently urged the central bank to start raising the interest rate to help defend the ailing rupiah and curb inflationary pressure particularly at a time when the interest rate in the U.S. is rising.

But during the past couple of weeks, the central bank officials have maintained that at current level, the domestic interest rate was still attractive for investors to retain their rupiah-based assets.

Choiril warned, however, that stronger inflationary pressure could resume in the coming months on strong demand for goods during religious festivities.

It is also feared that inflation would become stronger toward the year-end if the incoming new government decides to raise fuel prices at home amid the current surge in international oil prices.

Inflation during the January-September period increased to 3.8 percent, BPS said. The government has recently revised upward its inflation target for this year to 7 percent.

Another reason for the mild inflation in September could be the relatively stable rupiah during the month. In July, when the year-on-year inflation hit 7.2 percent, the rupiah's weaker footing against the U.S. dollar was seen as the main reason, alongside with political concerns leading up to the Sept. 20 presidential election runoff.

A weak rupiah makes the cost of imported goods and raw materials more expensive, thus putting pressure on local prices.