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.