Inflation manageable despite price hikes: Economists

Inflation manageable despite price hikes: Economists

Fitri Wulandari, The Jakarta Post, Jakarta

The plan to simultaneously increase electricity, fuel and
telephone rates next January is threatening to impede already
sluggish consumer spending, but economists have said the impact
on inflation would be manageable judging from this year's similar
trend.

They said the planned triple-price hike would push the
consumer price index upwards and weaken domestic consumption.

"The government relies on consumer spending as it's the main
engine for economic growth," said PT Paramitra Securities
president David Chang on Friday.

Domestic consumption, consisting of private and government
spending, contributes about 70 percent to the economy's growth.

The ability to buy goods and services, however, may come under
pressure as the government plans to raise electricity, fuel and
telephone rates next year.

Citing budget constraints, it has proposed the House of
Representatives to entirely scrap subsidy spending on fuel,
meaning vehicle owners will pay the full market price for fuel at
the pump.

At present, gas stations sell fuel at a maximum of 75 percent
of the market price, while industrial users pay full price.

The government proposal also calls for a quarterly hike in
electricity rates by an average of 6 percent. That would amount
to a 24 percent increase for the whole of next year.

On telephone rates, state-owned telecommunications firm PT
Telkom has asked the House for an average 33 percent increase in
local phone call rates.

Telkom's plan follows last year's agreement with the House, in
which the state company is allowed to raise telephone rates by
45.46 percent over a three-year period.

The three plans have yet to obtain the House's approval, with
legislators calling the electricity price hike too imminent.

Economist Chatib Basri played down the impact on consumption.
"The government's plan won't cause any severe setbacks because of
the stable exchange rate," the University of Indonesia economist
said.

The rupiah's exchange rate has been the main factor
determining inflation, as local manufacturers require large
amounts of imported material for products sold to both the
domestic and export market.

Chatib said that a relatively stable rupiah rate to the U.S.
dollar throughout the year had helped ease inflationary pressure
and thus maintain consumer spending despite last January's
triple-price hikes.

The annual inflation rate, he estimated, would likely fall
below 10 percent this year and next. It was 12.55 percent last
year.

Aviliani, an economist at the Institute for Development of
Economics and Finance (Indef), agreed with Chatib's prediction,
adding that the public had slowly adjusted to the recurrent fuel
and power price hikes since the 1997 economic crisis.

"What the government should do is control the exchange rate to
make goods affordable for the public," she said.

Aviliani added that the government should also prevent people
from stockpiling fuel or goods, which often occurs ahead of price
hike announcements.

"When people start to hoard goods or fuel, this is what really
causes prices to go up, not the price increase itself," she
explained, while urging the government to intensify market
inspections on these goods.