Indonesia's Purchasing Power Weaker? See Cash Outflow & Inflation
Whereas Indonesia's inflation pace usually accelerates markedly ahead of the Idul Fitri due to rising consumer spending, the relatively moderate inflation in June (0.66 percent m/m) can be taken as a sign that Indonesia's purchasing power is still rather weak. Another sign that indicates weak purchasing power is that the amount of cash in circulation in Indonesia during the Ramadan and Idul Fitri celebrations fell short of the central bank's initial estimates. Consumption of unsubsidized fuels, however, has nearly doubled.
The central bank of Indonesia (Bank Indonesia) stated that the total cash outflow from the lender of last resort amounted to IDR 140 trillion (approx. USD $10.6 billion) between the start of the holy Islamic fasting month (Ramadan) in early June 2016 and the end of last week. However, Bank Indonesia had prepared IDR 160 trillion (approx. USD $12.1 billion) in cash money for the holiday period.
Read more: Islam & Indonesian Culture: Impact of Idul Fitri on the Economy
The total cash outflow of IDR 140 trillion this year is roughly the same as realization one year ago. This standstill is a sign that economic growth and household consumption have not rebounded yet in Southeast Asia's largest economy (household consumption accounts for about 58 percent of Indonesia's gross domestic product). Traditionally, consumption in Indonesia rises (and therefore inflation also has a peak) ahead of the Idul Fitri celebrations that mark the end of the Ramadan month. In this period consumers purchase a large quantity of food items, clothes and gifts.
Although the 0.66 percent (m/m) inflation in June was the highest monthly June inflation pace in the past three years, it needs to be emphasized that the Idul Fitri celebrations started earlier in 2016 and therefore June should carry a larger chunk of inflation this year.
Inflation in Indonesia:
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Source: Statistics Indonesia (BPS)
Meanwhile, Indonesia's state-owned energy company Pertamina prepared a larger quantity of fuel reserves as rising demand during the Idul Fitri holiday (4 - 8 July 2016) causes consumption of unsubsidized fuels to nearly double (particularly Pertalite and Pertamax). Pertamina stated that it now has enough gasoline and diesel fuel reserves for 20 days to supply the 2.4 million cars and 5.6 million motorcycles that are estimated to fill the roads during this year's holiday.
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The inflation rate in Indonesia is always understated and has traditionally always been understated!