Indonesian Government: Inflation Rises in 2013, but Eases in 2014
The government of Indonesia expects inflation to rise to 7.2 percent in 2013 because of the increase in the price of subsidized fuel in June, and expects it to ease to 4 percent in both 2014 and 2015 provided that good monetary policy is implemented. This good monetary policy should particularly be targeted at maintaining food security. The projections were presented by the Fiscal Policy Agency (Badan Kebijakan Fiskal), the Ministry of Finance, and Indonesia's central bank Bank Indonesia.
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, rearranging 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 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).
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