In the case of Indonesia this year, higher electricity prices are expected to push inflation up by 1 percent. When we add higher (non-subsidy) fuel prices, LPG prices, and the higher tobacco excise, then Indonesia's consumer price index could climb up to 2 percent in 2017, Madiyono said.

Read more: Analysis of Indonesia's Inflation

Traditionally, Indonesia's inflation performance is highly vulnerable to the government's administered price adjustments. Fuel subsidy cuts in mid-2013 and late-2014 led to soaring inflation (see table below). While President Joko Widodo has managed to scrap a large chunk of fuel subsidies in early-2015 (when low global oil prices managed to limit the impact on the nation's inflation rate) and redirect these funds to structural economic development (for example infrastructure development), the government is now eager to cut electricity subsidies.

Considering inflation will rise, Madiyono expects growth of demand (and supply) of credit will not touch two digits this year, even though the central bank (Bank Indonesia) put its target for credit growth in Indonesia in 2017 at the range of 10 - 12 percent (y/y).

Meanwhile, Bank Mandiri, a state-controlled lender and one of Indonesia's biggest commercial banks, expects Indonesia's inflation rate to rise to 4.2 percent (y/y) in 2017, primarily due to higher administered prices.

Inflation in Indonesia:

Month  Monthly Growth
          2013
 Monthly Growth
          2014
 Monthly Growth
          2015
 Monthly Growth
          2016
January          1.03%          1.07%         -0.24%          0.51%
February          0.75%          0.26%         -0.36%         -0.09%
March          0.63%          0.08%          0.17%          0.19%
April         -0.10%         -0.02%          0.36%         -0.45%
May         -0.03%          0.16%          0.50%          0.24%
June          1.03%          0.43%          0.54%          0.66%
July          3.29%          0.93%          0.93%          0.69%
August          1.12%          0.47%          0.39%         -0.02%
September         -0.35%          0.27%         -0.05%          0.22%
October          0.09%          0.47%         -0.08%          0.14%
November          0.12%          1.50%          0.21%          0.47%
December          0.55%          2.46%          0.96%          0.42%
Total          8.38%          8.36%          3.35%
         3.02%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank (BI) Target 2008-2016:

  2008 2009 2010 2011 2012 2013 2014 2015 2016
Inflation
(annual % change)
 9.8  4.8  5.1  5.4  4.3  8.4  8.4  3.4  3.0
BI Target
(annual % change)
 5.0  4.5  5.0  5.0  4.5  4.5  4.5  4.0  4.0

Source: Bank Indonesia

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