Signs of Stagflation?
Executive Summary
Similar to April, May 2015 was considered another critical month for the trade balance for Indonesia. In the previous years, the period starting from the third month prior to Ramadan was considered critical because of the spike in imports. However this year the months of April and May 2015 recorded trade surpluses, and the surpluses were not small. There might be several factors at play here. The first is certainly the fall in oil as well as other commodity prices, which lowered the value of imports to the country despite the volume of imports remaining high, or in fact increasing. The second is that the demand for those imported products may be falling due to the softening economy. This might be true if the volume of imported products also declined. The third factor is the increasing share of exports of manufactured products. This increase somewhat offset the fall in the exports of oil and other commodities. Therefore, while the total trade balance was in a way deflated, the total activity may not necessarily fall.
The May 2015 trade balance data shows that exports declined from the previous month, reaching $12,564.6 million, down $639.1 million or 4.11%. Imports also declined, to $11,609.6 million in May 2015 from $12,626.3 million in the previous month, a decline of $1,016.7 million or 17.90%. As a result, the Trade Balance in May 2015 was in surplus of $955 million, more than double the surplus of the previous month, of $434 million. Therefore, for the first five months of this year, the trade balance registered a surplus of $3,730 million.Meanwhile, the foreign exchange reserves of Bank Indonesia at the end of May 2015 remained at $110.8 billion.
In the meantime, inflation crept higher in May, by 0.50%. With the stronger inflation in May, total inflation this year reached 7.15%, significantly higher than in April 2015. However, core inflation was relatively milder, at 0.23%. With the mixed data on price increases, and the positive trade balance, Bank Indonesia decided to keep the interest rate constant at 7.5%.
Signs of higher inflation, together with milder growth, have in some cases already been dubbed as a kind of “stagflation”, albeit minor. My own view is that while the economy has slowed a bit, economic activity remained positive. Therefore, dubbing the economy as experiencing stagflation is certainly premature at this time. However, I believe there is a need for economic stimuli in order to move the economy into forward gear again.
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