Inflasi di Indonesia
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The level and volatility of Indonesia's inflation rate have historically been higher than in some peer emerging nations. Whereas these other emerging countries shared inflationary rates of between three and five percent during the period 2005 to 2013, Indonesia contained an average annual inflation rate of around 8.5 percent in the same period.
Peaks in Indonesia's inflation volatility correlate with administered price adjustments. Energy prices (fuel and electricity) are set by the government and therefore do not float according to market conditions, meaning that the resulting deficit has to be absorbed by subsidies. This puts serious pressure on the government's annual budget deficit and also limits public spending in more long-term productive matters, such as infrastructure and social expenditures. Moreover, re-arranging energy subsidies implies political risks as social unrest emerges inflicted by inflationary pressures. One characteristic of Indonesia is that a large quantity of its population is clustered just above the poverty line, meaning that a relatively minor inflationary shock can push them below that line. When the Susilo Bambang Yudhoyono administration decided to reduce its massive fuel subsidies in late 2005 due to the rising international oil price, it soon led to double-digit inflation rates of between 14 and 19 percent (year on year) until October 2006. Furthermore, the country's core inflation - which excludes items that are vulnerable to temporary price volatility - has been volatile as well because of second round effects of energy price adjustments that pass through to the broader economy (for example through rising transportation costs).
Reduction of energy subsidies remain a top priority on the government's agenda. In early 2012, the government proposed a fuel price increase but social unrest and political opposition in parliament made a sudden increase impossible. Eventually in June 2013, gasoline was raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD $0.56) per liter. But despite the 2013 price hike, a significant portion of Indonesia's fuel prices remain subsidized and therefore various international organizations (including the World Bank and International Monetary Fund/IMF) as well as domestic institutions (such as Indonesia's Chamber of Commerce and Industry/Kadin) support further subsidy reductions. In 2013 and 2014, the government has also reduced subsidies for electricity - both for households (although exempting the poorer segments of society) and industries.
Indonesia's inflation outlook is highly influenced by the decision to further reduce these subsidies. The World Bank estimates that a IDR 2,000 increase in fuel prices can add about three percentage points to the level of headline inflation and can add over one percentage point to core inflation. Electricity price hikes, however, are estimated to have a smaller impact (< 1 percent) on the pace of inflation. As an illustration, the central bank of Indonesia (Bank Indonesia) initially targeted an inflation rate of 4.5 percent in 2013. However, after the fuel and electricity price hikes, inflation accelerated to 8.37 percent (yoy) by the year-end.
Inflation of Indonesia 2008-2015:
(annual percent change)
|Bank Indonesia Target
(annual percent change)
Sources: World Bank and Bank Indonesia
Indonesia's characteristic volatile inflation rate causes a traditionally larger deviation from the annual inflation projections of Bank Indonesia. The consequence of such inflationary uncertainty is that it creates economic costs, such as the country's higher (domestic and international) borrowing costs compared to its emerging market peers. When a good track record of meeting annual inflation targets is established, greater monetary policy credibility will follow.
The lack of quantity and quality of Indonesia's infrastructure also entails robust economic costs. This hampers connectivity in the archipelago, thereby increasing transportation costs for services and products. Distribution disturbances due to infrastructure-related issues are frequently reported and made the government realize the importance of more investments in the country's infrastructure. Infrastructure has been labelled a top priority in the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (abbreviated MP3EI); an ambitious long-term government development plan which is yet to bear fruit.
Food prices are traditionally highly volatile in Indonesia and subsequently impose a big burden on the poorer households who live under or just above the poverty line. These households spend more than half of their total expenditure on food items. Higher food prices therefore cause serious poverty basket inflation which may lead to increases in the level of poverty. Failing harvests in combination with a slow reaction of the government to substitute food products with food imports are causes for inflation peaks.
Traditional Peaks of Inflation in Indonesia
Discarding administered price adjustments, there are two traditional annual peaks of inflation in Indonesia. The December-January period always brings higher prices due to Christmas and New Year celebrations, while the traditional floods in January (amid a peak of the rainy season) results in disrupted distribution channels in several regions and cities, thus causing higher logistics costs. The second peak comes in the July-August period. Inflationary pressures in these two months emerge as a result of the holiday period, the holy Muslim fasting month (Ramadan), Idul Fitri celebrations and the arrival of the new school year. A marked increase is detectable in spending on food and other consumables, accompanied by retailers adjusting prices upwards.
Monetary Policy and the BI Rate
With annual GDP growth close to six percent, the economy of Indonesia has been rapidly expanding in recent years, characterized by surging domestic demand (domestic consumption accounts for around two-thirds of the country's economic growth), robust private sector credit growth and increased business access to credit. Moreover, public sector wages have increased due to administrative reforms and private sector wage growth has accelerated (Indonesia's regional minimum wages were raised significantly in 2012 and 2013). As robust economic growth brings along inflationary pressures, recent monetary policies (in 2013 and 2014) were aimed at safeguarding financial stability, particularly after inflation surged due to the 2013 fuel prices hike and amid the looming end of the Federal Reserve's quantitative easing program (which led to large capital outflows from emerging markets, including Indonesia), at the expense of further economic growth.
Bank Indonesia (BI), Indonesia's central bank, has as main objective to ensure rupiah stability. It uses a wide range of instruments to stem mounting inflationary pressures in the country. Its bank rate policy is adjusted when inflation targets are not met. Between February 2012 and June 2013, the country's benchmark interest rate (BI rate) had been set at a historic low of 5.75 percent. After this period, inflationary pressures increased due to higher fuel prices and global uncertainty about the US quantitative easing program. Subsequent capital outflows resulted in sharp rupiah depreciation. Therefore, Bank Indonesia adjusted its BI rate upwards. Another measure to tighten monetary policy was the raising of the reserve requirements on both local and foreign currency deposits at Indonesian banks. Lastly, BI curtailed foreign investors' demand for Central Bank bills (SBIs) by extending the required holding period from one to six months, stretching the maturity of SBI issues to nine months and by introducing longer maturity non-tradable term deposits (which are available to banks only). These measures aimed at mitigating the flow of 'hot money' into Indonesia.
Benchmark Interest Rate of Indonesia 2008-2013:
|Bank Indonesia Rate
(percent at year-end)
Source: Bank Indonesia
Indonesian Inflation in Global Perspective
The table below puts Indonesia's recent inflation performance (annual percent change) in global perspective by comparing it to inflation figures from the United States (USA) and China.
¹ indicates prognosis
Source: World Bank