IMF Warns Indonesia that Inflation Rate Rises

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The International Monetary Fund or IMF revised Indonesia’s inflation projection to 4% by the end of 2022 from the previous 3.5%. The increase in the inflation rate was the impact of the Russian-Ukrainian war. The IMF also revised Indonesia’s 12-month average inflation from 2.9% to 3.3%.

Looking at the IMF’s projections, Indonesia’s inflation will be at the point above Bank Indonesia’s target of 2-4%. The revised inflation projection is in line with the IMF’s correction of their global inflation projection for developed countries to 5.7% from 3.9%.

For developing countries, inflation is estimated to increase this year to 8.7%, from 5.9% previously.

In addition to revising global inflation projections, the IMF also corrected global growth this year to 3.6% from the previous projection of 4.4% at the beginning of 2022. For Indonesia, the IMF still maintains its growth projection at 5.4%.

According to the IMF, the Russo-Ukrainian war further catapulted global inflation, which had already soared before the war.

“Before the war, inflation had risen due to soaring commodity prices as a result of the Covid-19 pandemic. The pandemic disrupted the balance of supply and demand,” said the IMF, in its report World Economic Outlook: War Sets Back the Global Recovery.

Food commodity prices in several regions, before the war, had also soared due to weather disturbances.

“The war has increasingly disrupted supply. Prices of metal commodities, energy minerals, and food have soared,” said the IMF.

Furthermore, the IMF warned that a spike in inflation would bring several consequences. Among these are weak growth, tighter monetary policy, and increased spending on social protection.

“Central banks in Latin America, the United States, and developed countries are already under pressure to raise their benchmark interest rates as inflation continues to soar,” the IMF said.

For the record, inflation in the United States (US) jumped 8.5% (year on year / YoY) in March, the highest level in 40 years. Meanwhile, Brazil jumped 11.30% (YoY) in March. Indonesia itself recorded inflation of 2.64% (YoY) in March which was the highest level since April 2020 (2.67%).

“The increase in inflation makes the central bank accelerate tight monetary policy. They will choose to implement aggressive policies to suppress inflation,” the IMF said.

The IMF estimates that inflationary pressures due to new supply issues will ease towards 2023. “As a result, inflation will remain high for a longer period than our previous projection,” the IMF said.

MF added that the increase in inflation also forced policymakers to secure the budget for social protection. The budget is expected to reduce the burden on those who are vulnerable to rising prices and interest rates.

The IMF explained that the impact of war on inflation movements will be different in each country. This impact will be influenced by how much exposure a country has to commodities.

Some countries will experience price spikes due to rising food prices while others due to energy prices. The impact of war on inflation is also determined by how big the role of food and energy commodities in the inflation basket is.