Indonesia inflation rises ahead of Ramadan

Sep 4, 2007 - Indonesia's inflation accelerated in August as a weaker currency pushed up import costs and Muslims increased spending in preparation for the holy month of Ramadan.

Consumer prices rose 6.5 per cent from a year earlier, following a 6.1 per cent gain in July, the Central Statistics Bureau said in Jakarta yesterday. Economists were expecting a 6.3 per cent increase. Prices were up 0.8 per cent from a month ago.

Bank Indonesia's senior deputy governor Miranda Goeltom said last week that instability in global markets caused by concerns about US housing-loan defaults meant it was 'not a good time' to cut borrowing costs.

The central bank, which has reduced interest rates six times this year amid easing inflation, next meets in three days to discuss monetary policy.

'For now, they will likely be constrained by the recent pressure on the rupiah amid ongoing global financial turmoil,' said David Cohen, an economist at Action Economics in Singapore. The central bank may still reduce its benchmark rate by a quarter-point before the end of the year if inflation pressures ease, he added.

The rupiah has declined 4.2 per cent in the past two months, the worst performer among Asia's 10 most-traded currencies, amid waning demand for emerging-market assets. A weaker currency spurs inflation by making imports more expensive.

Bank Indonesia last month kept its reference rate for bill sales unchanged at 8.25 per cent, after 13 cuts since May 2006. The decision was expected by economists.

Inflation is also quickening as consumers in the world's most populous Islamic nation stocked up on food items before the holy month of Ramadan, when families also buy clothes and travel from cities back to their home villages. More than four-fifths of Indonesia's 235 million people are Muslims.

Ramadan starts on Sept 13 in Indonesia this year. Indonesia's government expects the cost of rice, vegetable oils and meat to rise as much as 10 per cent during Ramadan, Trade Minister Mari Pangestu said on Aug 22. Demand for some food staples may gain by up to 20 per cent, she said.

Core inflation, which excludes government-enforced price increases, was 5.7 per cent in August, compared with 5.8 per cent in July, according to yesterday's report. That was less than the 5.8 per cent expected by economists in the Bloomberg survey.