'Weak consumer demands helps ease inflation'

'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.