Prices inevitably rise every Ramadhan in Indonesia. This seasonal spike in prices is affected by increasing public demand for goods. Price increases are significant if the supply of staple foods cannot meet demand.

In the last six years during the fasting month and around Idul Fitri, known locally as Lebaran, the average increase in the consumer price index stands at 0.94 percent, significantly higher than the figure for inflation in other regular months of 0.38 percent. The highest ever recorded spike in monthly inflation during the fasting month occurred in 2013, when the average inflation rate in July-August reached the 2 percent level. In 2015, inflation in June-July was around 0.73 percent, while the average for the other 10 months of the year was just 0.18 percent.

High inflation in this period is driven by higher prices of the commodities that serve as important ingredients for some staple foods commonly consumed in the fasting month and during Lebaran. Once again, a similar phenomenon of soaring prices is expected to be repeated in June-July this year.

Historically, price hikes typically begin to be seen two months before the arrival of the fasting month. Prices start to crawl upward until they stabilize for at least one month after Lebaran. This price volatility occurs gradually starting from the level of producers.

Looking at developments in the price of harvested dried unshelled rice from the time of its production, data from the Central Statistics Agency (BPS) shows that during May 2016, the average price of rice at the farm gate rose by 4.17 percent month-on-month (mom) to Rp 4,440 (34 US cents) per kilogram, in line with the price rise at the milling level of 4.32 percent mom to Rp 4,527 per kg.

In addition, the increase in agricultural commodity prices is also reflected in a rise in the wholesale price index (agents) in the agricultural sector in May 2016. The wholesale price index for the agricultural sector went up by 0.25 percent from the previous month’s level of 349.4. This, in turn, led to a rise in the retail price of rice in the market of around 5.6 percent in May, compared to the same period last year, to Rp 13,039 per kg.

At the national level, non-rice food commodity prices, which have risen significantly in the current month of Ramadhan include beef, cooking oil, sugar and red chilies. In May 2016, the prices of all these foodstuffs showed an increase over their corresponding prices in May 2015 of 11 percent to Rp 105,623 per kg, 1 percent to Rp 13,885 per liter, 15.6 percent to Rp 14,459 per kg and 9 percent to Rp 30,445 per kg, respectively. The average price of these four foodstuffs is 4.8 percent higher than that during the months outside of Ramadhan.

Apart from price increases in food ingredients, throughout the fasting month and during Lebaran, there is typically also an enhanced demand for transportation, clothing, travel as well as various associated supporting facilities.

Public purchasing power at this time traditionally gets a boost from workers receiving a compensation allowance known as tunjangan hari raya (THR), essentially a bonus. This enhanced purchasing power has the potential to be exploited and without the control and supervision of the government and other relevant authorities, price monopolies involving unilateral price hikes would lead to even higher inflation at this momentous time of year.

Conversely, if prices are controlled through market operations using official rules from the government and other relevant authorities, inflation can be controlled.

The rise in prices ahead of and during the fasting month is also reflected in acceleration in the Retail Sales Index released by Bank Indonesia (BI). The latest survey indicates that the Retail Sales Index as of April 2016 stood at 196.6, up 0.5 percent from the previous month. Meanwhile, the Retail Sales Index for May 2016 is expected to reach the 201.3 level, an increase of 11.3 percent over the same period last year.

Compared to the month of April, this index will have increased by 2.4 percent. If we break it down, we see that increases mainly occur in the category of other household equipment, which typically includes home construction materials such as sand, roof tiles, floor tiling and plumbing parts.

In addition, increased consumer spending during Ramadhan and Idul Fitri also pushes up sales of clothing, thereby providing a boost to retail sales. Meanwhile, the Association of Indonesian Automotive Industries has released figures showing an increase in motor vehicle sales in May 2016 to 88,528 units, an increase of 4.5 percent from the previous month.

Consumer optimism driven by an improvement in consumers’ perceptions of current economic conditions is directly proportional to increases in retail sales and rising prices.

In the future, all parties should pay attention to the various risks that affect price increases. Inflation can be triggered, in particular, by developments in global commodity prices, especially fluctuations in the price of crude oil, volatility of the rupiah against the US dollar, and administered price adjustments (as regulated the government), such as its policies on fuel and electricity prices.

Price surges during the fasting month and Lebaran have become an annual occurrence. As always, government supervision is essential in order to avoid excessive volatility in the market. The government must take various policy measures and actions necessary to maintain the availability of food and the stability of food prices. These measures should include conducting regular operations at markets in all regions of Indonesia, performing unannounced inspections of traditional and semi-modern markets, improving the distribution infrastructure, especially in the regions which serve as the main conduits for transporting commodities, as well as opening the valve to allow for the import of commodities of which there is an insufficient domestic supply.

There also needs to be an improvement and strengthening of inflation control policy coordination, both at the central level as well as in the regions, through an enhanced performance on the part of the Inflation Control Team. With a number of anticipatory, educational and outreach measures involving the public, the typically burdensome phenomenon of inflation can be minimized.

This year, inflation in the period from January to May has remained under control, due to various policies adopted by the government as well as strong coordination between BI and the government to control inflationary pressure through actions aimed at ensuring supplies, especially those of various essential items, and managing future inflationary expectations.

In light of this, we predict that by year-end inflation will stand at around 4 percent, in line with BI’s inflation target for 2016 of 3 to 5 percent.

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The writer is senior quantitative analyst at Bank Mandiri

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