According to the latest data from Indonesia's Statistics Agency (BPS), Indonesia's inflation rate stood at 6.25 percent year-on-year (y/y) in October 2015. Since 2013 annual inflation figures have been high in Southeast Asia's largest economy due to two subsidized fuel price hikes (in June 2013 and November 2014) and the scrapping of gasoline subsidies in January 2015 (despite low petroleum prices this move led to inflationary pressures as global oil prices recovered in the first half of 2015 before sliding again in the second half).

As can be seen in the table below, Indonesia's monthly inflation was high in November and December last year, at 1.50 percent and 2.46 percent, respectively, due to the November subsidized fuel price hike. Although inflationary pressures always climb at the year-end ahead of Christmas and New Year celebrations, we expect to see a big decline in inflation in the last two months of the year. However, it is important for authorities to keep monitoring the supply-side, especially for products such as rice, chilies (amid drier-than-usual weather due to El Nino), as well as chicken meat and beef.

Inflation in Indonesia and Central Bank Target 2008-2015:

   2008  2009  2010  2011  2012  2013  2014  2015
Inflation
(annual percent change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4   3.0¹
Bank Indonesia Target
(annual percent change)
  5.0   4.5   5.0   5.0   4.5   4.5   4.5   4.0

¹ projection
Sources: World Bank and Bank Indonesia

Inflation in Indonesia:

Month  Monthly Growth
          2013
 Monthly Growth
          2014
 Monthly Growth
          2015
January          1.03%          1.07%         -0.24%
February          0.75%          0.26%         -0.36%
March          0.63%          0.08%          0.17%
April         -0.10%         -0.02%          0.36%
May         -0.03%          0.16%          0.50%
June          1.03%          0.43%          0.54%
July          3.29%          0.93%          0.93%
August          1.12%          0.47%          0.39%
September         -0.35%          0.27%         -0.05%
October          0.09%          0.47%         -0.08%
November          0.12%          1.50%
December          0.55%          2.46%
Total          8.38%          8.36%          2.16%

Source: Statistics Indonesia (BPS)

Indonesia amid Global Uncertainty

Bank Indonesia Governor Martowardojo also commented on the global economy. Martowardojo expects the world economy to remain plagued with a high degree of uncertainty in the period ahead due to the sluggish global economy, low commodity prices, and slowing capital inflows into emerging markets, including Indonesia. In fact, he said uncertainties may increase.

Although global economic growth is estimated to improve to 3.5 percent (y/y) in 2016, realization could be lower in case the economic slowdown in China is more severe than currently predicted or in case growth in advanced economies (European Union and Japan) will not live up to expectations. Regarding China's economy, Martowardojo commented that the shift from an export and investment-focused economy to a consumption-driven economy is not done overnight and this process can be accompanied by sudden shocks (growing pains). An example of such a sudden shock was the devaluation of China's yuan rate in August 2015.

Regarding the end of the commodities super-cycle, Martowardojo said it is important for Indonesia to become less dependent on commodity exports. If not, the country will see the continuation of weakening exports in the period ahead.

Bahas