Prices to Stay Tame If Producers Don’t Pass on Costs

Dion Bisara

The rupiah’s weakening will not cause inflation to soar, with many producers yet to increase prices for consumers and unlikely to change their minds any time soon, so that they can to maintain sales growth, analysts and executives say.

The rupiah has depreciated 5.6 percent against the US dollar so far this year and 9.1 percent year-on-year, reflecting the ongoing debt problems and slowing economic growth in the euro zone , which is pushing foreign investors to repatriate their income. On Friday the rupiah rose 0.1 percent to Rp 9,573 per dollar.

Consumer prices were up 4.58 percent in August from a year earlier due to rising food and transportation costs amid the Idul Fitri celebration. Still, core inflation, which better reflects supply and demand by excluding volatile food and energy prices, has remained stable at around 4.2 percent.

Bank Indonesia remains confident that inflation this year will be in a range of 3.5 percent to 5.5 percent. The central bank has kept its key interest rate at 5.75 percent since February.

“Inflation has been well-anchored despite recent [rupiah] depreciation and relatively robust domestic demand,” Helmi Arman, an economist at Citibank Indonesia, said in a report over the weekend.

Helmi noted that inflation of imported products at the wholesale level has been declining over the past year, counter to what would typically occur, when the rupiah’s depreciation is accompanied by higher inflation.

“This might be a lag effect due to margin compression,” Helmi said, meaning that producers are willing to absorb the higher prices and let their profitability slip rather than pass on rising prices to consumers.

Food and beverage industries have indicated that they will not raise prices through the end of this year, as the producers still have enough stocks of raw materials, some of which, including wheat and sugar, are imported.

“We estimate producers can hold the prices until December. In January, there will be a price adjustment,” said Adhi Siswaja Lukman, chairman of the Indonesian Food and Drink Business Association, as quoted by Antara last week.

Adhi said that companies in the food and beverage industry have been suppressing their profit margins amid the weakening rupiah and increase in prices of commodities.

“We don’t like to increase the price because it can affect sales. Still, if it cannot make a profit, the price has to increase,” Adhi said. He warned that prolonged low margins would limit companies’ ability to expand their market and to innovate by doing research on new products.

Processed food, beverages, cigarette and tobacco accounted for 13 percent of the components that made up Indonesia’s inflation last month, according to the Central Statistics Agency (BPS). Combined they were the second-largest contributor to headline inflation after raw food like fruits and vegetables.

Aside from processed food, Citibank’s Helmi noted that prices of some imported products such as steel, machinery, textiles, and electrical equipment have also shown “a tendency of declining prices,” citing excess manufacturing capacity from China and Japan.

China and Japan are the biggest two exporters to Indonesia, jointly accounting for more than a third of Indonesian imports in the January-July period, according to BPS.