Prices down by 0.22 percent in February
Fitri Wulandari, The Jakarta Post, Jakarta
The consumer price index (CPI) fell 0.02 percent in February from the previous month as the rice harvest and a stronger rupiah resulted in lower prices for foodstuffs and lower education and recreation costs.
The Central Statistics Agency (BPS) also reported on Monday that year-on-year inflation during the month was 4.6 percent, the lowest in four years.
The CPI is an index of the prices of consumer goods.
"There is a possibility that deflation will occur again in March, especially if the quality of the rice harvest is not good because of the rain. This will result in lower prices," said BPS deputy chief Slamet Mukeno during a press conference.
The rice harvest started in the latter part of January.
Standard Chartered Bank economist Fauzi Ichsan said that the lower prices were not surprising given the fact that the rupiah had been strengthening for quite some time.
"The stronger rupiah has made imported goods cheaper," Fauzi told The Jakarta Post. The country's production system is heavily dependent on imported raw materials.
He said that this situation should also provide room for the central bank to further cut its benchmark interest rate.
"The lower inflationary environment should convince the central bank to lower the interest rate. There is still room for a lower SBI, although not much," he said, referring to the interest rate on one-month Bank Indonesia SBI promissory notes.
The one-month SBI rate hit an all-time low last week when it fell to 7.48 percent from 7.66 percent earlier.
Aside from the stabilizing rupiah and lower inflation, Fauzi said surplus funds in the banking would also encourage the central bank to lower the benchmark rate.
According to Fauzi, the banks have daily surplus funds of between Rp 25 trillion to Rp 30 trillion.
"The central bank should push the banks to increase lending to the corporate sector ... so they should lower the SBI rate," Fauzi said.
But Raden Pardede of the Danareksa Research Institute said that any reduction in the SBI rate would be limited as inflation would likely increase in the run-up to the general elections over the coming months due to rising consumption.
"Sales of foodstuffs, and telecommunications, electronic and transportation equipment will pick up again for campaign purposes," he said.
Elsewhere, the BPS said February's deflation was caused by a 1.44 percent drop in the prices of foodstuffs, and a 0.22 percent decline in the cost of education and health.
But other prices increased, like those of processed food and beverages, and tobacco, which were up by 0.7 percent, housing, utilities and fuel up by 0.64 percent, clothing up by 0.03 percent, and transportation and communications up by 0.12 percent.
The agency also said that cumulative inflation during the first two months of this year was 0.55 percent. The government's full-year inflation target is 6.5 percent.