'Weak consumer demands helps ease inflation'

The Jakarta Post, Jakarta

While having a positive impact on the country's economy, the current declining inflationary trend indicates the worrying fact that the public's purchasing power has been on the decline, according to analysts.

Fauzi Ichsan, StanChart economist, told The Jakarta Post that the public's purchasing power had been on the decline for the past few years in line with the decline in foreign investment and a consequent decline in consumer demand.

This had helped stabilize the prices of goods over the past few months.

"So, the current benign inflationary environment is not entirely the result of stable prices for goods, but also because the members of the public have limited income to spend buying things," Fauzi said on Tuesday.

He said the poor investment showing over the past three years had badly hit domestic industry, with many firms being forced to reduce production capacity and lay off workers. This has led to a decline in the public's purchasing power.

"That has been the case for at least two years, and this is what is causing relatively low consumer demand," he said, adding that a continuing increases in utility prices were causing further difficulties.

Fauzi was referring to the recent report from the Central Statistics Agency (BPS) that showed that inflation remained in check, with the rate reaching 2.11 percent over the first eight months of the year, the lowest level in decades.

Theoretically, low inflation should be good for the economy as it paves the way for Bank Indonesia to keep aggressively cutting its benchmark interest rate -- already at an historic low -- and eventually push the banks to make loans cheaper.

The interest rate on Bank Indonesia's one-month SBI promissory notes currently stands at 8.83 percent, as against around 13 percent earlier this year.

The government has been boasting that the fact that inflation is pretty much on track to meeting the full-year target of around 6 percent is the result of sound macroeconomic management.

But, rather than boasting about its accomplishments, the government should instead focus on how to jack up the people's purchasing power, a crucial factor in keeping the country's domestic consumption robust, Fauzi added.

"So, real investment is the key word as it can create plenty of job opportunities and thus strengthen the purchasing power of the public," he said.

A researcher at another foreign bank concurred, saying raising the public's purchasing power was the only way to boost domestic consumption.

Consumption has been the main engine of the country's economic growth, but its contribution had been decreasing lately, both added.

Recently, the Danareksa Research Institute revealed that consumer confidence in the country was falling, signaling a weakening in purchasing power.