Administered Price Adjustments to Cause Rising Inflation in Indonesia
Indonesia's Deposit Insurance Agency (LPS) expects Indonesian inflation to reach 4.7 percent year-on-year (y/y) in full-year 2017, just within the central bank's 3 - 5 percent (y/y) inflation target. Didiek Madiyono, Executive Director of the LPS, said administered price adjustments will be the primary reason why the inflation rate of Indonesia will accelerate from 3.0 percent (y/y) in 2016 to 4.7 percent (y/y) in 2017. Administered prices are those prices that are set by the government. Usually when the government changes its subsidy policies, it needs to adjust certain prices.
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