No Fear of the Inflation Specter
Yopie Hidayat (Contributor)
SIGNS of global economic recovery are becoming clearer. However, the economic recovery also carries with it a frightening specter: inflation. If inflation runs out of control, its ill effects are no less troublesome than a pandemic-induced downturn. Prices are currently rising across the globe for various commodities from food to energy.
The most important number for the financial market is the inflation rate in the United States. Alongside unemployment rates, this is the main reference used by The Federal Reserve when they decide the monetary policies. As of April, core inflation in the US has reached 3.1 percent year-on-year, the highest since April 1990. The US economy is warming up. However, The Fed is undaunted, firmly holding on to the belief that the US inflation is temporary in nature.
It is here that the debate grows heated. More and more economists are questioning the views of Jerome Powell and company. That is because this time, the trigger for inflation comes from various factors, from the jump in demand to the contraction in supply due to Covid or climate disturbances. The recovery of the supply chain leading up to lower prices will require time. Global inflation can persist for quite a while and push inflation in the US as well.
President Joe Biden’s new policy can also increase inflation in a more permanent way. At the end of April, Biden signed an executive order to all Federal Government contractors to raise the minimum wage to US$15 dollars per hour, from the current rate of US$10.95. This policy will only come into effect next year.
However, its effects are beginning to be felt. Many corporations are now facing demands for a pay raise. Amazon, for example, must now increase wages by US$3 per hour. But even before that, the effective minimum wage at Amazon was already at US$15 per hour. The effects of this pay raise to the US economy will certainly be significant. Amazon employs 800,000 workers in the US. It seems that other corporations must make the same raise.
The increase in wages pushes a more permanent inflation. There will be an increase in purchasing power, which means a rise in demand, and thus higher prices. The Fed’s belief that the current inflation is only temporary is increasingly losing ground. Instead, the following key questions are ringing ever louder through the markets: will The Fed start its tapering earlier? Will an interest rate hike come before the end of 2022?
The specter of inflation looms over the financial market. In the real sector, inflation has grown beyond a mere threat. The negative effects seem unavoidable. It appears that Indonesia will not be spared from this pressure of global inflation. One of them comes from the jump in food commodity prices.
The monthly Food Price Index released by the UN’s Food and Agriculture Organization has soared 40 percent in a year as of May. This is the biggest price jump since 2011. Even if the effects are not very apparent now, this rise has the potential to create inflationary pressure in the coming months. Various imported food commodities are important inputs to the domestic food industry. More expensive raw materials will cause the industry to adjust its prices.
Another serious problem can come from the jump in oil prices. The Brent oil price, which is the market benchmark, has risen past US$71 dollar per barrel. Meanwhile, the government budget pegged the oil price at US$45 per barrel. If oil is consistently expensive throughout 2021, the problems that arise will be more severe than simple inflation.
If the government is unwilling to increase the price of fuel, the government budget that is already at a Rp1,006-trillion deficit will be increasingly burdened by subsidies. On the other hand, letting fuel prices rise will add to the inflation which causes economic recovery to be even more difficult. Higher oil prices will also add to the current account deficit because Indonesia is still importing one million barrels of oil and its derivative products every day.
Instead of looking for solutions to exorcise the specter of inflation, the government is actually planning to purchase more than Rp1,700 trillion worth in weapons until 2024. The specter of inflation is no longer fearsome to policy makers in this absurd country.