J. Soedradjad Djiwandono: The inflation headache commences?

The inflation headache commences?

By: Prof. J. Soedradjad Djiwandono, Ph.D., Emeritus Professor of Economics, Faculty of Economics and Business, Universitas Indonesia, and Adjunct Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore


Independent Observer – (19–25/8/2022) Our domestic inflation rate has been sliding upward quicker and quicker, threatening to spiral out of control. The July 2021 to July 2022 figure is 4.94 per cent. Consider, however, how the January to July rate of this year was already 3.85 per cent; is it somehow possible the year-on-year later will likely top last year’s figure. These numbers are admittedly not as high as the spectacular US annual rate of 9.1 percent; nevertheless, the situation is certainly starting to become ominous for the market and hurting families relying on a fixed income. A looming global food shortfall, in addition to a gas supply problem occasioned by the Russia-Ukraine war, along with disruptions in supply chains and a heatwave have all been exacerbating this development. From gas price to transport costs on top of a tight monetary stance of the US and other developed economies to fight inflation, all combines to push prices upward. It is not clear when this development will mellow out into a more conducive one, but even now this is already a major headache for governments globally.

I do not know for sure how Bank Indonesia expects to change its policy in the face of these new developments, but maintaining a constant rate of interest is certainly out of the question. By how much it should be raised and for how long are questions I do not dare to even make a guestimate. But as I kept saying, I trust in the competency of the Governor and his team, so that I am confident they will act accordingly, with prudence.

From the production and supply side, a similar move must also be conducted in no time. Rice and other staple food products, together with a supply of fertilizer and its transport are issues which cannot be overlooked. In short, a concerted and coordinated effort must be made in the real and monetary sectors to avoid any misstep that could result in a full-blown crisis. Let us wish the authorities the best of luck.

Meanwhile, in the US the expectation is that inflation will subside, from a current rate of 9.1 per cent to 8.7. If this comes to pass, the prestige of the Fed under Chairman Jerome Powell will certainly be reinforced. Even if it is no substantial reduction, it is in the right direction and more importantly correctly supports the Fed prediction that the policy is targeted to influence market expectations on inflation receding. This is a good investment to move further: not simply calming inflation further, but resuming economic growth, commensurate with what is going on in the labor market.

It will not be easy to expect any similar development to take place in the EU economies. For one thing, the prospect for a definitive conclusion to the Russia-Ukraine war is still not likely. More unnecessary tension seems to be developing with the acceptance of Sweden and Norway as full members of the E.U., as President Erdogan of Turkey defies any consensus among members to accept them into the EU. While inflation rates in EU economies have not been as acutely high as they are in the US, they would of course like to see lower inflation as well. In the meantime, an economic recession has been threatening the UK and others, including Italy, Spain and Portugal. In short, the EU economies face more complicated challenges than the US. And what about Japan? That nation has been living some time with no economic growth, so in terms of what the Japanese want, that is of prime importance. Japan has not had to deal with inflation for some time, so this is not a problem at this time as well.

As I alluded before, most emerging economies report inflation numbers generally lower than those of the US or the EU, at between 3-4 percent. I have not noted any immediate problem for them, except for the implication of a strengthening USD, with its ramifications on emerging economies’ import bills and imported inflation. In other words, they also must be on guard facing this development, to manage the ramifications of inflation for their respective domestic economies.


Source: Independent Observer. Edition: August, 19-25, 2022. Rubric Opinion. Page 6.