The Rise of Inflation: Will The Hawk Come?

My plans for a road that's less traveled are looking a little unraveled; inflation is roaring, and fuel costs are soaring... Yikes, six hundred bucks for the gravel!

-   Road Less Traveled by Jeff Kyser (2022)

Inflation has returned, and it is raging louder than ever. Prices are rising all over the world, and it is putting a strain on everyone. "Yikes, six hundred dollars for the gravel!" just as what the poem above expresses. 

After portraying headlines in the United States and now the United Kingdom, the issue has now become a focal point of policy debates in many other economies, including emerging markets and developing economies.  Inflation in emerging markets has reached its highest point since 2008, at 8.5 percent in March 2022. Such a sudden, widespread spike in high inflation (by today's standards) has not occurred in more than 20 years.

Meanwhile, Indonesia's inflation had just reached 4.94%, a seven-year high driven by rising food and energy prices. The central bank, however, remains unconcerned about the situation, as core inflation (which excludes government-controlled prices and volatile food prices) stays low at 2.86%.

Even though core inflation is low, headline inflation is on the rise, and it is costing the people. Thus, this makes people wonder when the "hawk" will show up. What does data tell us about inflation? What can we learn from history?

Indonesia's Condition

Despite a deteriorating macroeconomic situation, Indonesia is thought to be doing well in terms of inflation control when compared to its peers. This is not only the case of Indonesia, in fact, inflation in Asia is also lower than the rest of the world. Data reveals that food accounts for a portion of the price differential between Europe and America, as well as numerous non-Asian rising nations. Food prices have risen globally, but the impact has been uneven, according to Abdul Abiad, director of macroeconomic research at the Asian Development Bank. 

Even so, Indonesia's July inflation comes amid soaring food and energy prices globally as well as crop failures domestically (Yuwono, 2022). Major contributors to rising inflation include hikes in the prices of chillies and shallots because of crop failures amid recent heavy rainfall.

Food prices have the greatest impact on developing economies, but there are explanations why Asia's countries have experienced decreased inflationary pressure as well. For starters, supply-chain bottlenecks are not as severe as in the West. According to Drewry, a supply-chain consultancy, the cost of transporting a 40-foot container from Shanghai to Rotterdam has climbed by roughly 60% in the last year, reaching $13,686. The return trip, on the other hand, costs a little more than a tenth of that, at $1,445, a rate that has reduced by 1% in the last year.

Transportation prices for some trade corridors are still more than five times higher than their five-year average prior to the pandemic, according to June data, and many shippers have locked in contract rates at twice or triple the price they used to pay the carriers. According to purchasing manager surveys, supplier delays continue to rise in most of Europe and America, particularly on secondary shipping routes, but are decreasing in China, India, Indonesia, Thailand, and Vietnam.

Global trends have a greater impact on energy costs than on other products and services. Rising energy costs have been the most significant driver ofto Asia's inflation surge, accounting to a third of the overall increase recently, according to Goldman Sachs analysts. 

In Indonesia, inflation is also not as rapid as countries in the west as in the beginning of the reopening of the economy, demand was weak, causing low and steady inflation. Government subsidies, including fuel, gas, and electricity subsidies which accounts for Rp. 502 trillion, have also dampened the effect of rising inflation.  

Will the Hawk Come?

The main reason for the current inflationary phase in Indonesia is cost-push, which means that it is driven by rises in production costs (supply chain bottlenecks, high energy prices, and many more). Other geopolitical factors, such as Russia's invasion of Ukraine, have also contributed to price increases.

However, both transportation costs and delivery times have decreased significantly in recent years. Higher inflation for food and energy prices will likely slow the fall. Health care and housing costs typically account for a sizable portion of consumer bills. As a result, the economy will grow faster because the housing sector demands numerous inputs that may be supplied by the home market (Nazara, 2022).

Following periods of increased inflation, the economy can recover. Inflation can, however, precede a recession, as was the case with Indonesia's first inflation in the 1960s.

In Indonesia at the time, inflation occurred as a result of Soekarno's unrealistic and ambitious lighthouse projects and inflationary policies. This was followed by a recession, which resulted in Indonesia's first recession.

However, based on the data, it appears that Indonesia will not enter a recession, despite the fact that some countries have. GDP is 5.01% positive, and the debt-to-GDP ratio is 42%. The budget deficit remains under control at less than 4%, the trade balance has been in surplus this year, and foreign exchange reserves total $135 billion.

Strong employment growth data is also creating economic "momentum." According to the figures, job creation is continuing, household finances are robust, consumers are spending, and businesses are expanding.

What triggered the inflation in the first place can have an impact on what happens to the economy after a period of high inflation.

The present economic cycle will be influenced by the number of people working since it will affect the amount of goods produced, such as electronics or autos. Prices will fall as suppliers increase their production levels (Hogan, 2022).

Meanwhile, demand for commodities has already begun to level off, with people deferring purchases of discretionary items as inflation rises (Chang, 2022).

According to the central bank's consumer survey, consumers are less confident about making purchases. The Consumer Confidence Index in July 2022 was 123.2, remaining in the positive zone (index >100), but down from 128.2 the previous month.

Consumers should anticipate a reduction in energy costs in the following months. This relief has already begun fuel prices, which are determined by the worldwide market and are based on oil refining costs, have fallen for more than 50 days in a row.

The average price of a gallon of gas is $4.06 as of Aug. 8, a significant drop from a high of more than $5 in June. This will benefit not only the government, which will receive subsidies, but also companies whose products require gasoline.

Looking at data and history, we shall see that the hawk will come. Indicators are looking good for Indonesia, and the central bank seems very careful in implementing their monetary policies. Despite the tightening of monetary policy by central banks all around the world, Bank Indonesia seems to not get affected due to their ability to stick with their monetary policy framework.

References:

Agarwal, R., & Kimball, M. (2022, June). The Future of Inflation Part I: Will inflation remain high? IMF. Retrieved August 19, 2022, from https://www.imf.org/en/Publications/fandd/issues/2022/03/Future-of-inflation-partI-Agarwal-kimball 

Chang, E. (2022, August 9). When will inflation go down? Forbes. Retrieved August 19, 2022, from https://www.forbes.com/advisor/personal-finance/when-will-inflation-go-down/#:~:text=A%20July%20analysis%20by%20supply,inflation%20cycle%2C%E2%80%9D%20he%20says. 

Freight rates declining in 2022 in the face of uncertainties . The Maritime Executive. (2022). Retrieved August 19, 2022, from https://maritime-executive.com/article/freight-rates-declining-in-2022-in-the-face-of-uncertainties 

Limanseto, H. (2022). Ditengah Peningkatan Inflasi Global, Laju Inflasi Indonesia Tahun 2021 Tetap Terkendali Rendah dan Stabil. Ditengah Peningkatan inflasi global, Laju inflasi Indonesia Tahun 2021 Tetap Terkendali Rendah Dan stabil - Kementerian Koordinator Bidang perekonomian Republik Indonesia. Retrieved August 19, 2022, from https://www.ekon.go.id/publikasi/detail/3578/ditengah-peningkatan-inflasi-global-laju-inflasi-indonesia-tahun-2021-tetap-terkendali-rendah-dan-stabil 

Mahabarata, Y. (2020, August 19). Learn from the first recession in the Republic of Indonesia. VOI. Retrieved August 19, 2022, from https://voi.id/en/memori/11671/learn-from-the-first-recession-in-the-republic-of-indonesia 

Nikkei Asia. (2022, July 1). Indonesia inflation rate climbs to 5-year high of 4.35% in June. Nikkei Asia. Retrieved August 19, 2022, from https://asia.nikkei.com/Economy/Indonesia-inflation-rate-climbs-to-5-year-high-of-4.35-in-June 

Siregar, K. (2022). CNA explains: Why Indonesia's inflation rate has jumped to a 7-year high. CNA. Retrieved August 19, 2022, from https://www.channelnewsasia.com/asia/cna-explains-why-indonesia-high-inflation-rate-2861616 

Suroyo, G., & Sulaiman, S. (2022, August 1). Indonesia inflation jumps to 7-year high, c.bank unfazed. Reuters. Retrieved August 19, 2022, from https://www.reuters.com/markets/asia/indonesias-july-inflation-jumps-7-year-high-2022-08-01/