Beware of US Inflation Spike

The weakening of the rupiah against the US dollar, will be followed by an increase in domestic prices because 60 percent of industrial raw materials still rely on imports.

KOMPAS/TOTOK WIJAYANTO (TOK)

An employee of a foreign currency exchange company, Valuta Artha Mas, at ITC Kuningan, Jakarta, counts and checks the condition of US dollar bills, Wednesday (29/6/2022). The Fed has raised its interest rate by 150 basis points (bps) to the level of 1.5-1.75 percent.

JAKARTA, KOMPAS — The surge in inflation in the United States needs to be monitored because it adds to the uncertainty of the global economy. If not mitigated properly, these conditions can disrupt the country’s economic recovery.

The United States statistical agency noted that US inflation in June reached 9.1 percent on an annual basis – the highest annual inflation level since 1981. This has the potential to encourage the US central bank, the Federal Reserve, to be more aggressive in raising its benchmark interest rate. So far this year alone, the Fed has raised its interest rate by 150 basis points (bps) to the level of 1.5-1.75 percent.

In a press conference ahead of a meeting of finance ministers and central bank governors (FMCBG) from the Group of 20 in Nusa Dua, Bali, on Thursday (14/7/2022), US Treasury secretary Janet Yellen explained that inflation in her country had been triggered by high energy commodity prices. This is the impact of Russia's political tensions with Ukraine, which has triggered an increase in energy commodity prices.

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Yellen expressed confidence that current inflation had reached its peak. In response, the main economic policies will be focused on reducing inflation. Nevertheless, Yellen remained optimistic about the US economy. According to her, the condition of the US labor market is very strong.

Bank Indonesia (BI) Deputy Governor Yuda Agung explained that despite continuing to rise, inflation was still under control. However, according to him, BI is ready to adjust the benchmark interest rate if core inflation continues to rise. Currently, BI maintains the benchmark interest rate at 3.5 percent.

KOMPAS/ELSA EMIRIA LEBA

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Yuda Agung said that BI's monetary policy this year would prioritize pro-stability. Other BI policy mixes aim to encourage economic recovery (pro-growth).

People’s Consultative Assembly (MPR) Chairman Bambang Soesatyo said that to curb the surge in domestic inflation, the government needs to fix the food production and distribution system. Strong supervision is also needed to prevent the presence of speculators who have contributed to the surge in food prices on the market.

Interrupting the recovery

Center of Reform on Economics (CORE) economist Yusuf Rendy Manilet said that if the Fed was more aggressive in raising its interest rates, financial market stability in developing countries would be disrupted by capital outflows.

“In financial markets, this policy can trigger capital outflows, which are caused by the widening gap between domestic interest rates and international interest rates. Funds from emerging markets move to the United States, causing the exchange rate to weaken," he said when contacted on Thursday (14/7).

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> Curbing Inflationary Pressure

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Yusuf Rendy Manilet cited as an example the weakening of the rupiah exchange rate since last month, which was the result of the Fed's interest rate increase. At the close of BI's Jakarta Interbank Spot Dollar Rate (Jisdor) trading on Thursday, the rupiah was at the level of 14,999 per US dollar. As for the spot market, the rupiah closed at 15,020 per US dollar.

The weakening of the rupiah against the US dollar, he said, will be followed by an increase in domestic prices because 60 percent of industrial raw materials still rely on imports. The price increase will slowly raise the level of domestic inflation. As of June, Indonesia's inflation has reached 4.35 percent on an annual basis.

“Higher domestic inflation will make BI raise its benchmark interest rate more quickly. On the other hand, an increase in interest rate can disrupt the economic recovery process," said Yusuf Rendy Manilet. ( B KY/ D I M / N I A / I N A )

This article was translated by Hyginus Hardoyo.