beyondbrics

It’s the holiday season for more than 200m Indonesian Muslims and spending is up. During the holy month of Ramadan, shoppers buy clothing, gifts and festive food to break daytime fasting.

But there’s an added surprise to the usual inflation: extreme weather conditions behind Russia’s drought and flooding in Pakistan have hit Indonesia, where rice and palm oil prices have jumped. Analysts are upping inflation projections and the central bank will be slightly nervous about strong consumer spending.

At one of Jakarta’s main textile markets, Tanah Abang, traders said the rush for clothing began weeks ahead of Ramadan. “Average selling prices are up 20 per cent for all products, but they still come and buy”, said Adi Purwanto, a trader whose daily turnover has doubled to $1,000 per day. “We’re expecting more people will come when they get their Idul Fitri (Islamic holiday) bonus.”

Flooding has damaged Indonesian crops and prices have soared 10 per cent at the largest rice market in the capital since the start of fasting.  Indonesia, Southeast Asia’s largest economy, may have to buy more expensive rice on the international market if domestic production fails to meet demand or the harvest is late.

“We have already had two surprise jumps in June and July”, said Yougesh Khatri, senior economist for Southeast Asia at Nomura. “The near-term driver of inflation has been food prices and the long wet season is likely to hit crop yields and prices going forward. The drought in Russia and flooding in Pakistan is pushing up global prices and rice prices have also picked up in Indonesia.”

Khatri expects Indonesia’s CPI could top 7 per cent by the end of 2010, as these factors combine with possible hikes in electricity and petrol tariffs in 2011 that may add to inflation next year. Bank Indonesia will be under some pressure to step in with a rate hike if August and September bring similar upside surprises, he said.

At this rate, inflation will top a 2010 government forecast of 6.0 per cent CPI.

The trick for Indonesia’s central bank, which is determined to hold rates steady amid ongoing global financial uncertainty, is maintaining capital inflows, while curbing its long-time foe, inflation.

With additional reporting by Taufan Hidayat