Two Factors Contributing to Low Inflation

KOMPAS/KRISTI DWI UTAMI

One of the rice stalls in Pasar Minggu, South Jakarta, Wednesday (2/1/2019). Rice is one of the contributors to conversion for December 2018 from the food sector.

JAKARTA, KOMPAS – In addition to controlled prices, stagnant spending also contributed to the low inflation of 3.13 percent last year.

The inflation settled at 3.13 percent in January-December, 2018, slightly lower than 3.61 percent in 2017 but still within the range of the government’s target of between 2.5 and 4.5 percent, Statistics Indonesia (BPS) reported on Wednesday.

A number of organizations said the low inflation reflected the government’s success in controlling prices, especially those of basic commodities. However, some people saw the low inflation as a result of the sluggish demand and stagnant growth in household spending.

Although food prices could generally be controlled, foodstuff remained the main contributor to inflation during the year with a contribution of 0.68 percent, the head of BPS, Suhariyanto , said in a press conference in Jakarta on Wednesday.

Commodities, which predominantly contributed to inflation included gasoline, rice, cigarettes, chicken meat and fresh fish.

Bahana Sekuritas economist Putera Satria Sambijantoro hailed the good coordination between the government and Bank Indonesia in controlling inflation. The control on the supply and volatile price components can suppress the inflation rate from year to year.

Center for Reform on Economics (CORE) research director Piter Abdullah Redjalam said the low inflation could be seen from two sides. First, the consistency of the efforts in controlling the prices of basic necessities, and second, the control of prices coupled with sluggish spending growth, which was only around 5 percent. "The combination of the two has contributed to low inflation," he said.

However, Coordinating Economic Minister Darmin Nasution said the low inflation was not due to the decline in people\'s purchasing power, because demand continued to grow, although prices increased.

According to Finance Ministry data, in the third quarter of 2018, spending of households and non-profit institutions serving households grew 5.08 percent, a slight increase from 4.95 percent in 2017.

Slowing down

Institute for Development of Economics and Finance (Indef) economist Rusli Abdullah highlighted the slowdown in the growth of the core inflation component from 3.95 percent in 2015 to 3.07 percent in 2018. The slowdown in core inflation components indicated the slowdown in demand, which could also be reflected in the decline of people’s purchasing power.

According to Rusli, the income showed a decline, especially those in the group of 20 percent of the high-expenditure community (upper group). This proportion of the expenditure fell from 48.25 percent in 2015 to 46.09 percent in 2018 due to restraining consumption.

While the expenditure portion of 40 percent of the middle group and 40 percent in the low group increased from 1.97 percent to 2.19 percent. "The increase is more due to the support of social assistance from the government," he said.

Ideally, said Rusli, the expenditure of the two groups should not be dependent on government assistance. The government’s stimulus should focus more on structural policies that support people’s income.

Challenges

Although inflation is still within safe limits, the government should stay alert in regard to inflation this year. The challenges to maintain inflation will mainly come from pressure on the rupiah, limited oil supply due to the decline in world oil production, and extreme weather.

The projections of economists of the World Bank, Bank Mandiri, Indef, and CORE compiled by Kompas, indicate that inflation in 2019 may rise to between 3.5 and 4 percent. According to the macro assumption of the 2019 State Budget, the inflation is targeted at 2.5 to 4.5 percent.

The World Bank, in its quarterly development report on the Indonesian economy, said that the increase in inflation in 2019 would be accompanied by a rise in spending resulting from an increase in social spending and the labor market. However, investment will remain stagnant because investors tend to hold back until the legislative and presidential elections are over.

Piter said the government’s decision to increase fuel prices would have an impact on almost all components, starting from food to transportation. The government would be able to hold price increases if world oil prices were to fall below US$50 per barrel.

Bank UOB Indonesia chief economist Enrico Tanuwidjaja also said that maintaining inflation at 3 percent could provide more certainty for investors wanting to enter the country. (KRN / DIM / JUD)