Indonesia's Inflation Rate Holds Near 22-Month High

By Aloysius Unditu and Arijit Ghosh

Sept. 1 (Bloomberg) -- Indonesia's inflation held near a 22-month high in August on rising liquefied petroleum gas prices, sustaining pressure on the central bank to raise its benchmark interest rate for a fifth month.

Consumer prices rose 11.85 percent from a year earlier last month, after increasing 11.9 percent in July, the Central Statistics Bureau said in Jakarta today. That's less than the 11.9 percent median forecast of 24 economists surveyed by Bloomberg News.

Indonesia's central bank may increase its policy rate this month to slow price gains before the nation with the world's largest Muslim population prepares for celebrations after the fasting month of Ramadan, which began today. Faster-than- expected economic growth in the second quarter may allow the central bank to focus on fighting inflation.

``There is no doubt in our minds that the central bank needs to continue to raise rates,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. ``With the lagged impact of above-trend growth, pass through from high food prices'' and a 29 percent increase in fuel prices in May, inflation is expected to accelerate, she said.

Southeast Asia's largest economy unexpectedly accelerated 6.4 percent in the second quarter on rising exports and higher consumer spending. Economists had expected a 6.1 percent gain.

Fasting Month

Demand for goods and services usually increase during Ramadan, when the faithful fast from dawn to dusk. Indonesian Muslims spend and travel more during the fasting month to visit relatives, boosting prices. Credit growth, which expanded 32 percent in July, may also rise, fueling inflation.

The fasting month ``has always been a good month as loan demand from small and medium enterprises increases,'' said Sulaeman Arif Arianto, a director at PT Bank Rakyat Indonesia, the nation's second-largest bank by market value.

Indonesia's domestic motorcycle and car sales in July rose to a record, said PT Astra International, citing data from the Indonesian motorcycle association. Most Indonesians borrow to purchase vehicles.

PT Pertamina, Indonesia's state oil company, raised the price of liquefied petroleum gas used by households by 9.5 percent on Aug. 25 in the second increase since July to reflect higher costs.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net