Indonesia’s inflation rate in July 2013 was significantly higher than analysts had previously estimated. The country’s July inflation figure accelerated to 3.29 percent. On year-on-year basis, it now stands at 8.61 percent, the highest inflation rate since many years. Particularly food commodity and transportation prices rose steeply. The main reason for Indonesia's high inflation is the reduction in fuel subsidies. In late June, the government increased the prices of subsidized fuels in order to relieve the ballooning budget deficit.
The government of Indonesia and the central bank (Bank Indonesia) have been eager to limit inflation by engaging in market operations and through raising the benchmark interest rate (BI rate). Government policy to limit imports of certain food products (through import quotas), such as beef and horticultural products, have backfired as domestic production has not been able to meet domestic demand, thus giving rise to price increases. Government response to stabilize food prices have had limited success only. It is expected that in August more food supplies will arrive in Indonesia and will have a positive influence on the country's inflation rate.
Bank Indonesia raised its benchmark interest rate twice (in June and July) to mitigate inflation and to support the Indonesian rupiah. The interest rate now stands at 6.50 percent but speculation has risen that it may be raised again as inflation in July has surpassed the central bank’s target range. Meanwhile, the rupiah has weakened sharply against the US Dollar. As this development is in line with most other regional currencies, the central bank stopped using its foreign exchange reserves to support the currency and lets it weaken gradually to find its new equilibrium.
Higher inflation impacts on people’s purchasing power and therefore has a negative impact on domestic consumption (which accounts for about two-thirds of the country’s economic growth). Moreover, global demand for Indonesia’s commodities has not picked up yet. This has resulted in a slowing down of the country’s economic growth to about six percent.
According to Bank Indonesia, July is the month in which inflation peaks. The institution expects inflation to ease to one percent in both August and September (month to month).
(annual percent change)
¹ year to date
Source: Statistics Indonesia