Inflation Set to Soar

AP PHOTO/ROMAN HRYTSYNA

Firefighters try to extinguish a burning car after a Russian attack in Kyiv, Ukraine, Monday, Oct. 10, 2022. Russia unleashed a lethal barrage of strikes against multiple Ukrainian cities Monday, smashing civilian targets including downtown Kyiv where at least six people were killed amid burnt-out cars and shattered buildings. The onslaught brought back into focus the grim reality of war after months of easing tensions in the capital.

JAKARTA, KOMPAS - The Russo-Ukrainian war has entered a new phase, one that is increasingly escalating. Ongoing disruptions in the global supply chain will only intensify. As a result, energy and food prices are expected to skyrocket. Eventually, inflation will soar.

“The escalation of the Russo-Ukrainian war is by no means a surprise. Many experts predict that the war will continue to escalate and has not yet peaked,” said economist Agustinus Prasetyantoko, who is also a rector of Atma Jaya Catholic University, in Jakarta on Tuesday (11/10/2022).

It has been eight months since the Russo-Ukrainian war broke out on 24 Feb. 2022. Since Russia claimed four more provinces in eastern Ukraine in a referendum in late September, the war has entered a new, increasingly escalating chapter.

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Following Moscow’s move, there was an explosion on a bridge in Crimea on Saturday (8/10), which was allegedly Kyiv’s retaliation. After three days, the Russian military then bombarded several Ukrainian cities, marking Russia’s biggest attack to date.

According to Prasetyantoko, the latest developments of the Russo-Ukrainian war have a direct impact on global supply chain disruptions. In the short term, these conditions will mainly lead to an increase in energy and food prices.

“Even if supply is not decreasing, prices will continue to rise due to disruptions in the distribution chain,” he said.

Increasingly complicated

Another impact, continued Prasetyantoko, is that the escalation of the Russo-Ukrainian war complicates an already complex global issue. Thus, the global recession that is almost certain to occur will be realized sooner. This is especially the case for Europe and countries with close economic ties to both Russia and Ukraine. Indonesia is not expected to fall into a recession but will see a slowdown in economic growth.

“The long-term impact will be more permanent. If the war continues to escalate, the world might be different after this, in terms of trade, investment, logistics and supply chains. This reinforces the hypothesis that the world will change after all this,” said Prasetyantoko.

KOMPAS/HENDRA A SETYAWAN

A Prasetyantoko

He also predicts that one of the impacts on the domestic economy is an increase in commodity prices. As an exporter and importer of commodities, Indonesia will experience both positive and negative effects.

“We need to look at the net [value]. It is clear that inflation will rise, causing turmoil in the market. This will then be responded to with high interest rates. The rupiah exchange rate will be depressed,” said Prasetyantoko.

Separately, Adhi Lukman, chairman of the Indonesian Food and Beverage Producers Association (Gapmmi), stated that the domestic business world will be able to feel the impact of the complications caused by the Russo-Ukrainian war this time. One of the harshest impacts is that businesses are forced to accumulate more raw material stock due to supply chain disruptions.

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The prices of imported raw materials, said Adhi, have also gone up. It peaked once raw material prices increased by around 30-35 percent. Currently, the increase is 10-15 percent compared to last year's prices. Logistics costs have also skyrocketed. Logistics costs peaked when it rose 5-6 times before the war. Now, the increase ranges from 2-2.5 times more compared to before the war.

Adhi explained that in early 2022, the business world had raised its prices. However, the increases in the selling prices of products were not as high as the increase in raw material prices. People’s purchasing power and food price sensitivity were taken into account. Many companies thought long-term and thus prioritized their brand and business sustainability so that a decrease in profit becomes compensation by choice.

This can only be done by large companies, however. Small and medium industries, on the other hand, have much smaller capacities, continued Adhi. The ability to increase the stock of raw materials, for one, is very limited on a weekly and even a daily basis. Inevitably, small and medium businesses will become more vulnerable.

According to information from several companies, they will consider a price increase at the end of the year or at the beginning of next year.

By the end of the year or early next year, Adhi said, companies will calculate the increase in production costs. This includes, for example, increases in energy prices, raw materials, labor wages and inflation factors. Companies will also be negotiating with retailers and distributors.

“Thus, according to information from several companies, they will consider a price increase at the end of the year or at the beginning of next year. In the food and beverage sector, this increase usually ranges from 5-7 percent,” said Adhi.

The government targeted inflation this year at 3 percent. The inflation realized from January to September has reached 4.84 percent. Meanwhile, for 2023, inflation is expected to reach 3.6 percent. High inflation will erode economic growth, which was targeted at 5.2 percent this year and 5.3 percent next year.

This article was translated by Kesya Adhalia.