FY 2016 Inflation to Fall Within Bank Indonesia's Target
The central bank of Indonesia (Bank Indonesia) expects inflation to reach the range of 0.50-0.60 percent month-on-month (m/m) in December 2016 as Christmas and New Year celebrations, traditionally, give rise to higher consumer spending. The projection would also imply that full-year inflation will fall well within Bank Indonesia's target range of 3.0 - 5.0 percent (y/y) in 2016 (year-to-date, Indonesian inflation has accumulated to 2.59 percent), the second straight year of mild inflation (for Indonesian standards).
After Indonesian inflation surged to +8 percent (y/y) in 2013 and 2014 amid subsidized fuel price reforms, inflation has been relatively mild and stable since 2015 just above the 3 percent (y/y) level. Low and stable inflation is crucial for consumers and businesses. When there exists optimism and confidence, people will consume (more), while businesses will invest (more), hence supporting economic growth. Therefore, it is also important that Bank Indonesia's inflation target is achieved (even though Indonesia's central bank sets a rather wide target). Achieving the target enhances the credibility of Indonesia's monetary policy.
Indonesia's stable and low inflation over the past two years can be attributed to good monetary and fiscal coordination between the government and central bank. They managed to safeguard the supply-side (hence food price inflation has been under control), while the stable rupiah rate over the past two years managed to limit "imported inflation".
Mirza Adityaswara, Senior Deputy Governor of Bank Indonesia, said authorities need to remain monitoring food prices ahead of the year-end to keep inflation within the 3.0 - 5.0 percent (y/y) range in 2017 when there could emerge inflationary pressures in Indonesia due to tightening monetary policy in the USA (which would give rise to a strengthening US dollar). Last week, after raising the Fed Funds Rate for the second time in a decade, Federal Reserve Chair Janet Yellen said the US central bank may implement three more interest rate hikes in 2017.
Ahead of the year-end, volatile food prices and transportation tariffs are expected to cause some inflationary pressures in Indonesia.
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% | |
| Total | 8.38% | 8.36% | 3.35% |
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 | |
| 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