Weak rupiah accelerates inflation in June

Dadan Wijaksana, Jakarta

A weak rupiah has led to increased inflation and consumers nationwide are beginning to feel the pinch, with everything from spicy restaurant food to accommodation becoming harder to afford.

Eating in a modest Padang restaurant, known for its hot food, will now cost consumers about Rp 2,000 more a meal, as prices of spices soared in June, while the cost of house rents, water, and power also increased, according to the Central Statistics Agency (BPS) in its latest monthly inflation report.

The BPS reported on Thursday inflation in June had increased 6.83 percent from the same month last year as the weakening of the rupiah against the U.S. dollar during the month had made prices of goods and services more expensive due to the higher cost of imported raw materials.

The agency said the largest contributor to inflation was food materials, of which food spices saw the largest price increase of 4.74 percent in June.

It also said the cost of housing, clean water, electricity and fuel also rose by 0.55 percent.

Other commodities and services whose prices increased during the month included processed food, beverages, cigarette and tobacco (up by 0.15 percent); clothing (0.63 percent); health expenses (0.27 percent); education, recreation and sports (0.08 percent); and transportation and communications (0.07 percent).

Economists have predicted that inflation in June will be higher than in May as the rupiah has continued to weaken. Inflation for the year to May was 6.47 percent.

The local unit this year has fallen by around 10 percent against the dollar, raising the prices of imported raw materials. The country's production system is still heavily dependent on imported raw materials.

The weakening of the rupiah is being blamed on the political uncertainty at home amid the elections and on the rising interest rates in the U.S., which have prompted investors to switch their investment to dollar-based assets from rupiah-based assets.

"But, I think the impact (of the weakening rupiah) is not being felt as badly as it was in May," BPS chairwoman Soedarti Surbakti, who is due to retire on Friday, said.

The accelerated inflation in June has provided further evidence inflation this year may surpass the government's full- year target of 6.5 percent. The government predicts inflation next year will decline to 5.5 percent.

Keeping inflation under control is one of the central bank's main preoccupations after the country suffered a hyperinflation problem during the late 1990s financial crisis.

High inflation would have dire consequences for the economy, which is currently struggling to recover from the impact of the downturn.

Inflation eats into people's purchasing power, which in turn undermines domestic consumption -- the main driver of economic growth during the past few years.

Stronger inflationary pressure would also eventually push the central bank to raise its benchmark interest rate, which in turn would put a brake on economic growth and make it more difficult for the government to service its huge domestic debt.

The BPS said on a monthly basis, inflation in June was at 0.48 percent.