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JAKARTA POST, 03 Mei 2013
Inflation is one of the major macroeconomic indicators used
to measure our economic performance. High inflation can diminish the value of
our money and, therefore, reduce our purchasing power. Thanks to inflation, the
price of 1 kilogram of meat today is much higher than last year. So, we should
be able to agree that low inflation is what we want as it will give us more
room to manage our consumption and savings.
Fortunately last year, we experienced a very low level of inflation. In December 2011 year-on-year, inflation stood at 3.79 percent, while at the end of 2012 the rate remained low at 4.30 percent. Before 2010, it was normal for Indonesia to experience 5 to 7 percent inflation along with our performing economy. But in the past two years, although the global economy faced serious problems due to the crisis in Europe, Indonesia consistently enjoyed more than 6 percent economic growth with inflation maintained at around 4 percent.
In economic theory, we are considered lucky if our economic growth is higher than inflation. In other words, our improvement in wealth is much faster than the increase in the price of goods, so we can enjoy our economic growth in more real terms.
However, well-maintained inflation does not mean that there are no problems in our economy. Quoting the International Monetary Fund’s (IMF) World Economic Outlook Report from early April, “Inflation has been remarkably quiet of late. And so, in a curious incident, we find a dog that did not bark.” The stability of inflation could be a reflection of the success of the inflation-targeting framework by central banks in anchoring inflation.
This is true for Indonesia, as Bank Indonesia (BI) has one and one job only — to maintain the stability of prices. During recent years, the independence of central banks and the inflation anchor of 4.5 +/- 1 percent helped Indonesia’s economy meet its target as real inflation was close to the anchor. BI keeps its interest rate at 5.75 percent, a level that has stood for more than a year, because we have had almost no threat from inflation.
With this high level of economic growth and low inflation, the government and central bank have room to loosen their fiscal and monetary policies. Sad to say, however, when everything seems to be on the right track, the government and BI fail to notice the silent threat to our economy.
Starting from the beginning of this year, our economic watchdog has warned that inflation began to bark really loud. Last month, monthly inflation was 0.63 percent, meaning that from January to March 2013 our inflation reached 2.41 percent. Due to this trend, it is almost impossible for us to meet our inflation target of 4.5 +/- 1 percent.
There are at least three reasons why we should fear far higher inflation in 2013 than in recent years. First, the price of staples will remain higher and push inflation to a higher level. The increase in the prices of meat, garlic, shallots and chili contributed the most to the inflation level in the first quarter of this year. Although we can expect more supplies of staples due to harvesting in April and imported meat and garlic that will lower their prices, there is a distinct possibility of another hike in prices in July and August due to the Ramadhan fasting month and the following festival of Lebaran.
Second, the demand for imported goods remains high while at the same time our currency depreciation is putting pressure on this year’s inflation rate. In addition, global purchasing power remains low due to the economic crises affecting developed countries, so the global demand for our export goods is declining despite their lower prices due to the rupiah’s depreciation.
Our foreign reserves have touched US$104 billion and will probably keep on falling until the end of this year, and the rupiah exchange rate against the greenback will remain weak at between 9,500 and 10,000. All these factors will further threaten our balance of trade, which has suffered an unprecedented deficit because we need to import goods in higher volumes and at higher prices but we export fewer goods at a cheaper price. One of the largest contributors to the deficit is the importing of oil by Pertamina to meet the domestic demand for gasoline.
Finally, in relation to the high volume of oil imports, the main engine of high inflation in the future is the increase in the price of subsidized fuel; a policy that the government expects will ease the burden on the state budget and prevent our exceeding the quota of subsidized fuel.
It is well-known that fuel-price hikes trigger inflation. As transportation costs become higher, the cost of production and, in turn, the cost of goods will skyrocket.
Last year was probably the right time for the government to increase fuel prices considering the low level of inflation, which would have meant that people would have become used to short-term shocks in inflation and the government would have had enough money to allocate to real sector priorities, such as infrastructure. Too bad that because of political pressure, despite surpassing the subsidized fuel quota and the fuel scarcity that hit Kalimantan, Sulawesi and most parts of eastern Indonesia, the government opted not to raise fuel prices.
This time, however, the government has fewer options and will very likely increase the subsidized fuel price. For sure, that policy will push inflation to a higher level.
A lesson to be learned from this case is that when the dog has already barked loudly enough, the government and BI should issue the best policy so we do not need to fear inflation. ●
Fortunately last year, we experienced a very low level of inflation. In December 2011 year-on-year, inflation stood at 3.79 percent, while at the end of 2012 the rate remained low at 4.30 percent. Before 2010, it was normal for Indonesia to experience 5 to 7 percent inflation along with our performing economy. But in the past two years, although the global economy faced serious problems due to the crisis in Europe, Indonesia consistently enjoyed more than 6 percent economic growth with inflation maintained at around 4 percent.
In economic theory, we are considered lucky if our economic growth is higher than inflation. In other words, our improvement in wealth is much faster than the increase in the price of goods, so we can enjoy our economic growth in more real terms.
However, well-maintained inflation does not mean that there are no problems in our economy. Quoting the International Monetary Fund’s (IMF) World Economic Outlook Report from early April, “Inflation has been remarkably quiet of late. And so, in a curious incident, we find a dog that did not bark.” The stability of inflation could be a reflection of the success of the inflation-targeting framework by central banks in anchoring inflation.
This is true for Indonesia, as Bank Indonesia (BI) has one and one job only — to maintain the stability of prices. During recent years, the independence of central banks and the inflation anchor of 4.5 +/- 1 percent helped Indonesia’s economy meet its target as real inflation was close to the anchor. BI keeps its interest rate at 5.75 percent, a level that has stood for more than a year, because we have had almost no threat from inflation.
With this high level of economic growth and low inflation, the government and central bank have room to loosen their fiscal and monetary policies. Sad to say, however, when everything seems to be on the right track, the government and BI fail to notice the silent threat to our economy.
Starting from the beginning of this year, our economic watchdog has warned that inflation began to bark really loud. Last month, monthly inflation was 0.63 percent, meaning that from January to March 2013 our inflation reached 2.41 percent. Due to this trend, it is almost impossible for us to meet our inflation target of 4.5 +/- 1 percent.
There are at least three reasons why we should fear far higher inflation in 2013 than in recent years. First, the price of staples will remain higher and push inflation to a higher level. The increase in the prices of meat, garlic, shallots and chili contributed the most to the inflation level in the first quarter of this year. Although we can expect more supplies of staples due to harvesting in April and imported meat and garlic that will lower their prices, there is a distinct possibility of another hike in prices in July and August due to the Ramadhan fasting month and the following festival of Lebaran.
Second, the demand for imported goods remains high while at the same time our currency depreciation is putting pressure on this year’s inflation rate. In addition, global purchasing power remains low due to the economic crises affecting developed countries, so the global demand for our export goods is declining despite their lower prices due to the rupiah’s depreciation.
Our foreign reserves have touched US$104 billion and will probably keep on falling until the end of this year, and the rupiah exchange rate against the greenback will remain weak at between 9,500 and 10,000. All these factors will further threaten our balance of trade, which has suffered an unprecedented deficit because we need to import goods in higher volumes and at higher prices but we export fewer goods at a cheaper price. One of the largest contributors to the deficit is the importing of oil by Pertamina to meet the domestic demand for gasoline.
Finally, in relation to the high volume of oil imports, the main engine of high inflation in the future is the increase in the price of subsidized fuel; a policy that the government expects will ease the burden on the state budget and prevent our exceeding the quota of subsidized fuel.
It is well-known that fuel-price hikes trigger inflation. As transportation costs become higher, the cost of production and, in turn, the cost of goods will skyrocket.
Last year was probably the right time for the government to increase fuel prices considering the low level of inflation, which would have meant that people would have become used to short-term shocks in inflation and the government would have had enough money to allocate to real sector priorities, such as infrastructure. Too bad that because of political pressure, despite surpassing the subsidized fuel quota and the fuel scarcity that hit Kalimantan, Sulawesi and most parts of eastern Indonesia, the government opted not to raise fuel prices.
This time, however, the government has fewer options and will very likely increase the subsidized fuel price. For sure, that policy will push inflation to a higher level.
A lesson to be learned from this case is that when the dog has already barked loudly enough, the government and BI should issue the best policy so we do not need to fear inflation. ●
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