Rising commodity prices are good for the Indonesian economy because the country is one of the world's biggest commodity exporters. However, rising commodity prices will also make it more difficult for the government to keep inflation within its target range of 2.5 - 4.5 percent year-on-year (y/y) in 2018.
For Indonesian standards, inflation is currently very low at 3.30 percent (y/y). There are two main reasons for this low inflation rate: (1) the relatively limited amount of energy subsidy reforms over the past 12 months (with the notable exception of a series of electricity tariff hikes in the first half of 2017) and (2) stable food prices.
However, rising commodity prices will put upward pressure on food prices. Meanwhile, rising crude oil prices (already exceeding the assumption of USD $48 per barrel that was set in the 2018 State Budget) means that the Indonesian government may have to raise prices of subsidized fuel if it wants to safeguard a healthy budget deficit and limit its spending on energy subsidies. About 60 percent of all fuel that is used in Indonesia involves subsidized fuel. Meanwhile, rising crude oil will also impact on Indonesian electricity tariffs.
Still, the central government may be somewhat reluctant to raise fuel tariffs significantly because we are not far away from new regional elections (scheduled for 2018) and legislative and presidential elections (scheduled for 2019). The government would not make itself popular if it decided to raise these prices significantly.
The year 2018 being a political year naturally gives rise to inflationary pressures. During political years there is always a surge in demand for matters such as food and textiles due to the rise in political activities and events. Another problem is that regional leaders will become overly focused on winning elections, implying they will focus less on regional prices or inflation. Thus, the central government will need to monitor carefully (and act swiftly) to keep prices stable around the country.
At the start of 2018 the government will also, again, raise the excise tax for tobacco products such as cigarettes by an average of 10.04 percent (effective per 1 January 2018). This could add about 0.2 - 0.3 percent to Indonesian inflation.
Indonesia Investments expects Indonesia's inflation rate to rise to 3.5 - 4.0 percent (y/y) in 2018, from an estimated 3.0 - 3.5 percent (y/y) in 2017.
Inflation in Indonesia:
Source: Statistics Indonesia (BPS)
Inflation in Indonesia and Central Bank (BI) Target 2008-2016:
(annual % change)
(annual % change)
Source: Bank Indonesia