Higher demand for consumer goods in combination with weak infrastructure (disrupting distribution channels) can rapidly cause inflationary pressure in Southeast Asia's largest economy. However, annual core inflation, which excludes administered price and volatile food prices, remained stable at approximately 5 percent (y/y) in June.

On a month-to-month (m/m) basis, Indonesian inflation rose 0.54 percent in June 2015, the highest monthly growth since December 2014 when inflation accelerated sharply due to a subsidized fuel price cut conducted by the government in the previous month. As the Ramadan month started earlier this year, the impact on inflation is also felt earlier compared to last year. In 2014, the monthly inflation pace in June was 0.43 percent (m/m).

In fact, Indonesia’s 0.54 percentage point (m/m) June inflation is lower than expected. Most forecasts, including a Bank Indonesia survey and Reuters poll, expected to see a monthly inflation pace between 0.6 and 0.7 percent.

Statistics Indonesia (BPS) further announced that calendar year inflation has now reached 0.96 percent in the first six months of 2015. This is a positive result compared to 1.3 percent over the same period last year. However, with Idul Fitri celebrations to commence in a few weeks, inflation is expected to accelerate further in July 2015.

Although the current inflation rate (7.26 percent) is well above the year-end target of Indonesia’s central bank (Bank Indonesia), inflation should ease toward the end of the year as the impact of last year’s higher subsidized fuels prices moderates. Bank Indonesia targets to see inflation in the range of 3 to 5 percent (y/y) at the end of 2015. In the Revised 2015 State Budget, the Indonesian government targets a 5 percent (y/y) inflation rate in 2015.

 Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
 Monthly Growth
January          1.03%          1.07%         -0.24%
February          0.75%          0.26%         -0.36%
March          0.63%          0.08%          0.17%
April         -0.10%         -0.02%          0.36%
May         -0.03%          0.16%          0.50%
June          1.03%          0.43%          0.54%
July          3.29%          0.93%
August          1.12%          0.47%
September         -0.35%          0.27%
October          0.09%          0.47%
November          0.12%          1.50%
December          0.55%          2.46%
Total          8.38%          8.36%          0.96%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia 2008-2014:

     2008    2009    2010    2011    2012    2013    2014
(annual percent change)
    9.8     4.8     5.1     5.4     4.3     8.4     8.4

Source: World Bank