CLSA The deflation vs. Inflation

The deflation vs. inflation discussion rages on. In Indonesia, macro data shows that there are signs that prices are moderating across the board, as pointed out by our economist Tony Nafte. Inflation dipped to 9.2% YoY in January 09 from 11.06% in Dec 08 on a 0.07% MoM decline - attached

Consensus is that inflation will eventually turn to deflation, but with the rupiah weakened at 11,800 vs low 9,000 in 1H08, I can assure you can that businesses here wouldn’t cut prices in a hurry. Importing equipments will be about 20% more expensive at current exchange rate. Prices are historically very sticky here. Car prices were raised 10-15% in Jan 09. Prices of home appliances are moving up. Food producers have opted to increase the size (easier to cut sizes later when they want to raise the prices) or improve quality of the product instead of lowering prices. Cement prices are not yet coming down. Even mini buses here refused to reduce their fare even after the city administration ruled for an Rp500 cut in public transportation fess citing the vehicle owner maintaining his daily rental rate.

Some will argue inflation and deflation are purely monetary phenomena - Read "The Money illusion" by Irving Fisher 1928. Inflation is not just a rise in prices (much more important to track real purchasing power), lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation. Fisher argues that inflation comes when governments are in "financial stress."

In a recent interview with the governor of Zimbabwe reserve bank Gideon Gono, he was asked whether his monetary policies were responsible for his country's economic problems. "I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of necessity to exist, to ensure my people survive, I had to find myself printing money.

We think deflation today, inflation tomorrow.