Inflation in Indonesia Achieves Target unless Subsidized Fuel Prices Increase

Martowardojo said: "We expect year-on-year inflation at 4.5 plus or minus 1 percent for 2014 but risks also stem from exchange rate volatility and higher prices due to the Idul Fitri celebrations which mark the end of the holy fasting month Ramadan. This can, for example, cause higher tariffs for air travel."

Juda Agung, Executive Director Economic and Monetary Policy at Bank Indonesia, said that the central bank is ready to use monetary policy to limit the impact of higher subsidized fuel prices. Although the Indonesian government had raised these fuel prices by an average of 33 percent in June 2013 (which made inflation accelerate significantly in the period June to August 2013), a considerable portion of fuels are still subsidized today. This is also a major reason why Indonesia has to cope with a large trade deficit in the oil & gas sector (and a current account deficit). Moreover, it burdens the budget deficit which recently was raised to 2.4 percent of gross domestic product (GDP) from an initial 1.69 percent of GDP. In fact, if the new government, which will be inaugurated in October 2014, will not raise prices of subsidized fuels then the government’s budget deficit is likely to exceed the new boundary of 2.4 percent (by law, the budget deficit cannot exceed the level of three percent of GDP). Lastly, massive energy subsidies curb room for the government to invest in more long-term and structural areas such as infrastructure, healthcare and education.

Agung said that if the new government raises the price of subsidized fuel by IDR 1,000 (USD $0.09) then it will add 1.6 percentage points to the country’s inflation figure. This means that the central bank’s target of 3.5-5.5 percent inflation in 2014 cannot be achieved, but at least will improve the fiscal and economic fundamentals of Southeast Asia’s largest economy.

Whether the new government will reduce fuel subsidies remains unknown although both presidential candidates (Joko Widodo and Prabowo Subianto) have stated to support a gradual reduction of fuel subsidies. On 22 July, the General Elections Commission (KPU) will announce the winner of the presidential election (held on 9 July 2014). According to most credible quick count results, Joko Widodo (Jokowi) won by a margin of about five percent.

 
Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014
January	1.03%	1.07%
February	0.75%	0.26%
March	0.63%	0.08%
April	-0.10%	-0.02%
May	-0.03%	0.16%
June	1.03%	0.43%
July	3.29%
August	1.12%
September	-0.35%
October	0.09%
November	0.12%
December	0.55%
Total	8.38%	1.99%

 

	Inflation Rate       June 2014	Inflation Rate   Calender 2014	Inflation Rate   year-on-year
General	0.43	1.99	6.70
- Core	0.25	1.88	4.81
- Administered Price	0.45	2.37	13.47
- Volatile	1.06	2.22	6.74

 

	2008	2009	2010	2011	2012	2013
Inflation (annual percent change)	9.8	4.8	5.1	5.4	4.3	8.4

^{Source: Statistics Indonesia}

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