Prima Wirayani, Jakarta – A benign consumer price index (CPI) in September indicates that consumer spending remains weak, economists say.
Annual inflation in September stood at 3.07 percent, on the lower bound of Bank Indonesia's (BI) target of 3 to 5 percent, latest official data shows.
The core inflation rate, which dropped to 3.21 percent from 3.32 percent in August and 5.07 percent in September last year, indicates that purchasing power remained weak, said PermataBank economist Josua Pardede.
"The low interest rate trend has yet to effectively trigger demand," he said, referring to the central bank's move to cut its benchmark interest rate by 125 basis points (bps) so far this year, and its relaxation of several policies to boost consumption.
The efforts, however, have not boosted demand, as indicated by nationwide banks' loan growth that averaged 6.7 percent, the weakest in six years. Overall economic growth is expected to rebound from a six-year low last year to 5 to 5.1 percent this year.
Consumers like 41-year-old Mindo Leona are choosing to spend wisely amid cool economic conditions. "If no promotions are offered, I will probably decided against spending under current economic conditions," the Jakarta-based private employee said. "I have to save for year-end events, including Christmas, I am also used to traveling with my relatives during that period."
Maybank Indonesia economist Juniman is of the view that consumers are spending wisely and not pushing to spend money on things they do not really need. "People's purchasing power weakens after Lebaran because there is no further cash stimulus from the government," he said. "Their spending goes back to normal."
At the same time, government spending also slows due to its cash-strapped budget, causing a lack of job creation that eventually weakens purchasing power.
To boost purchasing power, Josua said, the government should encourage the manufacturing sector and provide incentives for small and medium enterprises (SMEs), which absorbs a high number of employees.
Many economists projected full-year inflation to end up slightly above 3 percent, as long as the government could keep transportation and volatile food prices in check.
In September, the main cause of inflation was increases in communication costs, rent, education costs, cigarettes and red chili, said Central Statistics Agency (BPS) head Suhariyanto.
"We hope inflation will be in check in the next three months so that the target can be achieved," he told a press briefing on Monday.
Bank Danamon economist Wisnu Wardhana said if the spike in mobile rates, the first year-on-year (yoy) inflation since November 2007, continued as a trend, "we can expect a curb on its demand recovery".
He argued that domestic purchasing power had been supported by subdued inflation, with deflation in transport and communication triggering demand to rise in the first half of last year.
BPS deputy head for distribution and statistics Sasmito Hadi Wibowo said the outlook for full-year inflation would depend on price movement during the festive December month, which would be highly driven by transportation costs, as people usually traveled over the holidays, in addition to other factors, such as electricity and fuel prices.
"To me, it's likely the [3 to 5 percent] target will be achieved. The rate can even end up lower than the target," he said.