Beware of the Cost of Living Crisis

KOMPAS/KORNELIS KEWA AMA

A resident named Margaretha Mengi (52) who received the hope aid program at the Babau Village Head Office, Wednesday (2/3/2022).

Everything has gone up in price and expensive. This is what people are experiencing the world over, including Indonesia, following the global spike in food and energy prices. If it is not mitigated, the cost of living crisis will be unavoidable.

The Food and Agriculture Organization (FAO) has reported that global food prices are still high, though they have begun falling. However, food prices still have the potential to continue increasing due to food export restrictions, logistical barriers, weather anomalies, and the Russia-Ukraine war.

Also read:

> Living in a Pandemic

> Solidarity without Barriers When Adonara in Mourning

The FAO Food Price Index (FFPI) was at 157.4 in May 2022, a decline of 0.6 percent on a monthly basis and an increase of 22.8 percent on an annual basis. The FFPI reached an all-time high of 159.7 in March before declining slightly to 158.3 in April.

The increase in food prices, coupled with surging energy prices, has begun to affect cost of living. The United Nations Conference on Trade and Development (UNCTAD) recently reported that countries with large debts had started experiencing a cost of living crisis.

In fact, poor people in those countries have become more vulnerable to falling into a deeper “hole”, namely hunger. The affected countries are mostly located in Sub-Saharan Africa, the Middle East, North Africa, Eastern Europe, Central Asia, South Asia, East Asia, Latin America, and the Caribbean.

A 5 percent reduction in income further adds to the family’s burden life, as they must still pay for other needs, such as health services.

According to UNCTAD, every 10 percent increase in food prices reduces household incomes by 5 percent. A 5 percent reduction in income further adds to the family’s burden life, as they must still pay for other needs, such as health services.

In fact, the reduction in income is coming at a time when their income has not yet recovered from the impacts of the Covid-19 pandemic. The International Labour Organization (ILO) has reported that 60 percent of workers worldwide have lower incomes than before the pandemic.

Living costs

What about Indonesia? Amid the upward trend in domestic economic recovery, high inflation is looming. Inflation has started to increase due the surging prices of gas and fuel oil, as well as production and logistics costs. Another factor is the imposition of an 11 percent hike on Value Added Tax (VAT).

ERWIN EDHI PRASETYA

A resident smiles happily after receiving a package of presidential aid staples at the parking lot of the Graha Saba building, Solo, Central Java, Wednesday (5/6/2019).

The increase in the global price of crude palm oil (CPO) has also affected Indonesia. Cooking oil prices have also increased. The people are also facing difficulty in obtaining cooking oil, because a lot of cooking oil and its raw materials are exported.

Not only that, Indonesia has also been affected by the increase in the global prices of wheat, soybeans, meat and corn; not to mention the problems related to seasonal "diseases" when the prices of chilies and shallots are also rising and foot and mouth disease (FMD), a severe, highly contagious viral livestock disease, is spreading.

"I was shocked. Buyers complained, traders also complained. It seems that the cost of living has increased due to the increase in the prices of all basic needs, except rice," Trade Minister Zulkifli Hasan said after visiting Cibubur Market in East Jakarta on Thursday (16/6/2021).

Meanwhile, the chairman of the Indonesian Food and Beverage Producers Association, Adhi S. Lukman, said that the increase in the prices of processed or ready-to-eat food was inevitable. He said the price increase was caused by, among other things, an increase in the prices of raw materials, logistics costs, energy, and VAT.

Production costs have currently increased by up to 10 percent, resulting in reduced profit margins. Businesses, especially processed food producers, have begun recalculating their capital, profit margins, and production costs. "They started to increase the prices of their products by up to 5 percent at the beginning of the second semester of 2022," said Adhi.

According to data from Statistics Indonesia (BPS), inflation reached 3.55 percent on an annual basis in May 2022, the highest since December 2017. Meanwhile, Bank Indonesia estimates that inflation this year could reach 4.2 percent, above the government’s target range of 2-4 percent.

However, the monthly wage in February 2022 was still lower than the Rp 2.91 million recorded in 2019, before the pandemic.

On the other hand, individual incomes, especially for workers, have started to increase in 2022. However, personal consumption expenditures (PCE) have also increased due to rising prices. BPS data show that the monthly wage of workers averaged Rp 2.89 million in February 2022, an increase of 1.12 percent compared to the figure in February 2021. However, the monthly wage in February 2022 was still lower than the Rp 2.91 million recorded in 2019, before the pandemic.

Meanwhile, PCE increased 3.17 percent to Rp 1.22 million in 2021 from the figure in 2020. According to recorded expenditures, monthly spending among Indonesian consumers averaged Rp 622,800 for food and Rp 641,700 for nonfood items. With this year’s rise in food and energy prices, the personal consumption expenditure is expected to increase even more.

Policy options

Finance Minister Sri Mulyani Indrawati said the government should anticipate and be aware of the impact of global growth barriers and surging inflation. With the global inflationary rise and monetary tightening, most of the world’s countries had difficult policy choices to make.

"The Russia-Ukraine war has caused disruption to the production side, which has led to extreme increases in global commodity prices," Sri Mulyani told a House of Representatives (DPR) plenary meeting on Friday (20/5) in Jakarta.

In facing the situation, the government must introduce two alternative policies. The first was to immediately restore price stability or control inflation. This could be achieved through monetary and

fiscal tightening, which would have a negative impact on growth. The second option was to continue to support accelerated recovery of the economy, which had been hit hard by the pandemic.

If not, it would cause global stagflation, or high inflation accompanied by a recession, which happened in the early 1980s and late 1990s.

According to Sri Mulyani, these difficult policy choices must be managed properly. If not, it would cause global stagflation, or high inflation accompanied by a recession, which happened in the early 1980s and late 1990s.

“A condition of stagflation will have a negative impact on the whole world, especially on developing countries. The change in global risk must be the focus of attention and we must manage it with the right steps and in a timely manner, carefully but effectively," she said.

This year’s state budget aims to maintain purchasing power and energy prices. In addition to handling the Covid-19 pandemic, the state budget is also being used to finance additional energy subsidies, fuel and electricity compensation, as well as social assistance.

Meanwhile, during in an interview with Kompas daily at Kompas Tower in Jakarta on Wednesday (8/6), the International Monetary Fund (IMF) senior resident representative for Indonesia, James P. Walsh, said the IMF was focusing on two aspects in coping with the stagflation risk. First, high inflation must be addressed with monetary policies on high interest rates so that inflation can be controlled.

This type of monetary policy had the potential to restrain the pace of economic growth. Global stagflation would affect Indonesia’s trade balance as a result of the economic slowdown of important trading partners, such as the United States and China. The US economic slowdown would also affect Indonesian exports.

Second, with the high inflationary trend occurring throughout the world, the level of uncertainty regarding financial assets had also increased, especially currency exchange rates and interest rates.

“The trend of high interest rates in developed countries means that capital outflows to safe haven countries will be even faster. The combination of these two potential risks needs to be anticipated by the Indonesian government," he said.

(This article was translated by Hendarsyah Tarmizi).