Inflation Forecast Update Indonesia: What about Inflation in August?
Most analysts expect that Indonesian inflation will accelerate to around 7.43 percent (year-on-year) in August 2015 primarily due to imported inflation. As the Indonesian rupiah has been depreciating against the US dollar over the past couple of weeks while the central government recently raised import duties for a wide range of consumer products, inflationary pressures are estimated to rise.
However, Indonesia’s central bank (Bank Indonesia) holds another view. On Friday (28/08) Bank Indonesia Governor Agus Martowardojo stated that inflation is estimated to ease to 7.08 percent (y/y) in August (with August’s monthly inflation pace at +0.3 percent).
According to the latest data from Indonesia’s Central Bureau of Statistics (BPS) Indonesian inflation was 7.26 percent (y/y) in July 2015. Over the past two years inflationary pressure have been continuously high in Indonesia due to fuel subsidy reforms. In June 2013 and November 2014 the central government decided to raise the price of subsidized fuels, while gasoline subsidies were basically scrapped altogether at the start of 2015 (meaning that inflation accelerated in the period March-May 2015 as global petroleum prices somewhat recovered).
Inflation in Indonesia:
|Month|| Monthly Growth
| Monthly Growth
| Monthly Growth
Source: Statistics Indonesia (BPS)
Inflation in Indonesia 2008-2014:
(annual percent change)
Source: World Bank
In July 2015, Indonesia posted this year’s highest monthly inflation pace (+0.93 percent) as transportation costs and food prices rose amid the Ramadan and Idul Fitri celebrations. In this period, household consumption tends to rise while millions of Indonesians travel back to their places of origin for a few days (giving rise to higher transportation costs).
Indonesia has two traditional annual inflation peaks: (1) July-August (Ramadan, Idul Fitri and the start of the new school year), and (2) December-January (Christmas and New Year celebrations).
In the first seven months of 2015, Indonesia’s inflation accumulated to 1.90 percent, implying that Bank Indonesia’s year-end target is still within reach (Bank Indonesia’s targets annual inflation in the range of 3-5 percent in 2015).
The pace of inflation is a key factor for determining the country’s benchmark interest rate (BI rate). Earlier in August Bank Indonesia decided to maintain its BI rate at 7.50 percent (a relatively high figure) as it seeks to combat high inflation, support the rupiah rate and curb the country’s current account deficit. However, as the rupiah has been showing serious weakness against the US dollar (amid tightening US monetary policy and China’s yuan devaluation) it is doubted that Bank Indonesia will cut its interest rate environment this year.