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What is inflation and how is it measured in Indonesia?
Indonesia inflation rate: Historical context
Food and administered price goods drive inflation
Subsidised fuel prices
Rate hike to support rupiah
Indonesia inflation rate forecast
FAQs
By Fitri Wulandari
Edited by Jekaterina Drozdovica
15:24, 26 September 2022
Indonesia reacted to pressure from high oil prices by raising subsidised fuel prices by around 33% on 3 September.
The Indonesian government tripled energy subsidies, widening the state budget deficit.
Higher subsidised fuel prices could boost the inflation rate in the coming months and force the country’s central bank, Bank Indonesia, to hike interest rates.
Here we look at Indonesia’s inflation history and the latest economic news affecting the Indonesia inflation rate forecast in 2022 and beyond.
Inflation is the rise in prices of goods and services. It reflects a decline in money’s purchasing power. When prices rise, consumers have less money to spend, which has a significant impact on the cost of living, causing economic growth to slow.
In Indonesia, the country’s national statistics office, the Statistics Indonesia (BPS), calculates the Consumer Price Index (CPI) inflation in accordance with seven categories:
Foodstuffs
Processed food, beverages and tobacco
Housing
Clothing
Health
Education and sport
Transportation and communication
It measures the change in living costs in 90 cities in Indonesia, including 34 provincial capital cities. Supply factors that influence inflation include global oil price movements, failed harvests and natural disasters such as floods.
The Indonesian government and Bank Indonesia jointly set an inflation target. Based on a 2021 Finance Minister regulation, the inflation targets for 2022, 2023 and 2024 were at 3.0%, 3.0% and 2.5%, respectively, within plus or minus 1%.
Indonesia allocates energy subsidies covering gasoline, electricity and household liquefied natural gas to protect people in low-income groups. Fuel and LPG subsidies account for more than 50% of total energy subsidies.
As of July 2022, the energy subsidy accounted for roughly 6.7% of total government spending at IDR 3,106trn, according to the Finance Ministry data.
Energy subsidies are politically sensitive. The withdrawal of a large fuel subsidy in May 1998 sparked nationwide protests and riots, prompting President Suharto to resign.
The inflation rate reached an all-time high of 82.40% in September 1998, during the Asian financial crisis. The record low Indonesian inflation, or deflation rate, was -1.17% in March 2020. The rate averaged 8.88% from 1997 to 2022.
Indonesia was hit hard by the Asian financial crisis, which began with Thailand’s currency crash in July 1997. The rupiah depreciated 70% between July 1997 and January 1998 and the country’s stock exchange index fell 50%, an International Monetary Fund (IMF) report showed.
Between 2019 to mid-2022, Indonesia enjoyed a benign inflation rate period. Even in 2021, when other developed nations started to see rising inflation amid rebounding global energy prices and demand post-Covid-19, inflation in Indonesia remained below the government’s target. It averaged at 2.72% in 2019, 1.68% in 2020 and 1.87% in 2021. The inflation target was 3.5% for 2019 and 3% for 2020-2021.
With a low inflation rate, the Indonesian central bank gradually cut its BI 7-day (Reverse) Repo Rate to 3.5% in February 2021, from 6% in June 2019. The bank maintained its policy rate at 3.50% until July 2022.
The Inflation rate in Indonesia had only started to accelerate, exceeding the government’s inflation target in April 2022. Annual CPI rose to 3.47% in April, compared to 2.64% in March, according to data from BPS.
Food, beverages and tobacco recorded the biggest jump at 1.76%, in line with a surge in global commodity prices following Russia’s invasion of Ukraine. Indonesia relies on imports for some staples, including wheat and sugar.
Inflation continued to climb, peaking at an eight-year high of 4.94% in July. Food, beverages and tobacco remained the main driver with a 1.19% increase, followed by transportation at 1.13%. In August, however, the annual inflation rate eased slightly to 4.69%.
Inflation from administered prices, such as airplane tickets, household fuel and cigarettes, and volatile food groups were the main drivers for the peak reading in July. Nicholas Mapa, ING Group’s senior economist, wrote on 3 August:
Indonesia’s Finance Ministry increased the excise tax for cigarettes, cigars and other tobacco products by an average 12% from 1 January 2022.
XRP/USD
BTC/USD
Oil – Crude
Natural Gas
The country’s reliance on oil imports makes domestic fuel prices vulnerable to the volatility of global oil prices, which hit a record in March, and the US dollar to Indonesian rupiah exchange rate (USD/IDR), which also affects inflation. A stronger dollar and elevated oil prices boost fuel prices in rupiah.
On 10 July, Indonesia’s state-energy company, Pertamina, increased the price of household liquified petroleum gas (LPG) for a 12-kg canister to IDR 213,000-270,000 ($14-$17.86), from IDR 187,000-IDR 243,000 ($12.37-$16.08).
Volatile foods inflation stood at 11.47% year-over-year in July, up from 10.07% in June as heavy rains disrupted supplies of staples such as cooking oil, chillies, eggs and fresh fish, according to Bank Indonesia.
Indonesia relies on imports for some of its food staples, such as wheat, soybean and sugar. Prices for these agricultural commodities have risen this year, partly due to the war in Ukraine.
Bank Indonesia responded to rising inflation in July by lifting its policy rate by 25bps to 3.75% in its August meeting – its first rate hike since February 2021.
The Indonesian government’s decision to increase the price of subsidised fuel could keep inflation high in the coming months.
On 3 September 2022, President Joko Widodo raised the price of subsidised gasoline Pertalite to IDR 10,000 a litre, from IDR 7,500, and the price of subsidised diesel to IDR 6,800 a litre, from IDR 5,150.
The government resorted to hiking fuel costs as the 2022 subsidy tripled to IDR 502trn ($33.17bn), from IDR 152.5trn ($10.07bn), on rising crude prices.
Following the fuel price rise, Bank Indonesia opted for a 50 basis points (bps) rate hike, bringing the policy rate to 4.25% in September. The move aims to return core inflation to its target range of 3% in the later half of 2023 in anticipation of rising inflation pressure.
Bank Indonesia’s reluctance to raise its policy rate has contributed to the rupiah’s depreciation, as the US Federal Reserve’s (Fed) aggressive rate hikes continue to strengthen the dollar against emerging-market currencies.
As of 26 September, the USD/IDR was quoted at around IDR 15,127, gaining more than 6% year-to-date as the dollar’s value strengthened. Analysts, however, believed that the Bank Indonesia’s rate hike in the coming months will support the rupiah. Fitch Ratings wrote on 11 September:
The firm forecast the Indonesian central bank to continue to hike the rate until it reaches 5% by end 2023, before easing in 2024. It expected the USD/IDR to average IDR 14,850 from 2022 to 2024.
Bank Indonesia expected higher subsidised fuel prices to increase Indonesian inflation above its target of 3% plus or minus 1%, before returning to the target range in the second half of 2023. The bank said in a statement:
Indonesia’s inflation was expected to rise to 5.8% by the end of this quarter, according to Trading Economics’ Indonesian inflation rate forecast. The price growth was projected to ease to 3.5% in 2023 and 3% in 2024.
Fitch Ratings’ Indonesia inflation forecast saw the country’s annual inflation rate averaging 4.2% in 2022, before cooling to 3% in 2023 and 2024.
In its forecast on 22 September, Bank of America (BofA) expected Indonesian inflation to peak at 6% in December 2022, gradually falling to Bank Indonesia’s target of 3% by the end 2023.
In its 5 September forecast, ING predicted the Indonesia inflation rate to average 4.1% in 2022, 3.6% in 2023 and 3.5% in 2024.
Remember that analysts’ predictions can be wrong. Forecasts should not be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never trade with money you can’t afford to lose.
The current Indonesia inflation rate is 4.69%, as of 26 September 2022. It was considered high for Indonesia’s standard, but relatively low compared to inflation in developed nations.
Inflation from administered prices, such as airplane tickets, household fuel and cigarettes, and volatile food groups were the main drivers for the peak reading in July.
Indonesia has a relatively stable economy. Despite rising inflation, the Indonesian central bank expected the country’s economy to grow 4.5% to 5.3% in 2022. Note that analyst predictions can be wrong.
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