The World and Inflation

KOMPAS/ADITYA PUTRA PERDANA

The atmosphere of loading and unloading absorbed rice at the Katonsari Bulog Warehouse, in Katonsari Village, Demak District, Demak Regency, Central Java, Friday (19/3/2021).

The perception that the Delta variant and its impact are finally under control has triggered an increase in West Texas Intermediate (WTI) crude oil prices, which recently passed the US$70 mark to reach $76.50 per barrel. China is trying to control the cost push inflation by using its strategic oil reserves to control the rising oil prices. But these efforts have not been effective as the positive outlook on the world economic recovery continues to push up WTI crude prices. However, an interesting prediction made by Morgan Stanley in September was that if world oil prices reached the range of $80 per barrel, it could have the potential to damage the world\'s economic recovery which would, in return, hit oil prices again.

World supply chain

Expectations of the world economic recovery have been followed by the rise in prices of primary commodities and intermediate products, ranging from mining products, foodstuffs, agricultural products, wood, base metals to chips. The rising energy demand in the European Union and China has led to the return of coal as an energy source.

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Coal prices on China\'s futures market increased 4 percent in early September. Meanwhile in the Indian market, the price of the best quality coal produced by the United States rose 30 percent. The impact of the oil price increase on world production can be seen from the decline in the Purchasing Managers Index (PMI) in the manufacturing sectors of the world economic giants. China\'s PMI figure fell from 50.1 in August to 49.6 in September, which meant it had entered the contraction zone. In the US, the figure was still in the expansion zone, but the movement was relatively flat. The US’s PMI figure fell from 61.1 in August to 60.1 in September.

In some of the world\'s major ports, the long lines of container ships waiting to unload indicate there is a serious problem.

In several industrialized countries, such as the US, China, the United Kingdom, Russia, Germany and Australia, inflationary pressure from the production side does not only come from commodity prices, but also from the labor market. In some of the world\'s major ports, the long lines of container ships waiting to unload indicate there is a serious problem.

Such a phenomenon is partly caused by the difficulty in finding workers. First, because of the mobility restrictions imposed on workers as a consequence of the pandemic. Second, in general, employers must increase wages and salaries to lure workers as a premium for the possibility of being exposed to Covid-19.

DIDIE SW

Didie SW

Global supply chain problems are indicated by consumer price index inflation in the US which, although starting to flatten, remains above its long-term average. The US inflation in August was recorded at 5.3 percent, a slight decrease from 5.4 percent in June and July. The relatively high inflation is the price the US has to pay as its PMI figures are still very expansionary as a result of strong consumer demand. In

China, the inflation appears to be cooling faster as the increase in public demand is mostly taking place in the transport and energy sectors.

China\'s annual inflation was recorded at 0.8 percent in August. Meanwhile, the source of US inflation came from the rise in demand (demand-pull inflation) as well as an increase in production costs due to supply chain constraints (cost-push inflation). To reduce inflation on the demand side, the US Central Bank can use a contractionary monetary policy, by reducing its liquidity injection by $120 billion per month through the purchase of financial assets (tapering). But a consequence of this is that it could lead to the decline in economic activities amid a potential resurgence of the pandemic without being able to relieve cost-push inflation. As a result, the US could suffer stagflation like in the early 1970s.

Domestic impact

The world’s supply chain problems will not have a significant impact on Indonesia\'s inflation, because the sharp increase in the pent-up demand in Indonesia mostly occurred domestically. This can be seen from the consumer confidence index (IKK) in August published by Bank Indonesia. Income spent on consumption increased by 75 percent in August, slightly higher than 74.6 percent in July. As a result, the savings-to-income ratio decreased from 15.1 percent to 14.6 percent.

This indication can be seen in the pattern of GDP growth until the second quarter of 2021.

Pertamina\'s data show that the rise in demand is mostly related to people’s mobility. After declining in July following the implementation of the four-tiered social activity restrictions (PPKM), the consumption of all types of gasoline rose 5.77 percent in August. Meanwhile, the consumption of diesel fuel rose 4.22 percent. This indicates there was an improvement of mobility in the logistics or production sectors after the relaxation of the PPKM level 4. This indication can be seen in the pattern of GDP growth until the second quarter of 2021.

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From the V-shaped recovery pattern in these sectors, people’s expenditures were mostly related to relaxation-oriented activities. Positively, transportation such as warehousing and accommodation as well as the food and drink sectors have experienced the largest unused capacity due to the previous deep contraction, having an insignificant impact on inflation. Annual inflation was recorded at 1.59 percent in August, higher than 1.52 percent in July.

DIDIE SW

Didie SW

Another thing that keeps inflation under control is the relatively stable rupiah exchange rate in the range of Rp 14,200 to Rp 14,300 per US dollar. It means the imported inflation also remains under control. This stability is supported by the trade balance which has been in surplus for 16 consecutive months. In addition, thanks to its success in suppressing new daily Covid-19 cases, John Hopkins University CSSE has listed Indonesia as one of the countries that has successfully handled Covid-19 because it could reduce the number of the new daily cases by up to 58 percent in two weeks. As a result, Indonesia remains an attractive destination for portfolio investment. By remaining disciplined in applying health protocols, all of these positive factors can play an important role in maintaining the economic recovery in the coming quarters.

ARI KUNCORO, rector of the University of Indonesia

(This article was translated by Hendarsyah Tarmizi)