Inflation Spike Still Lurks in Indonesia

Indonesia's Traditional Market

Indonesia is still not safe from the threat of an inflation spike. Based on data from the Central Statistics Agency (BPS), the Consumer Price Index (CPI) in May 2022 experienced inflation of 0.40 percent every month (month-to-month/mtm).

Inflation is expected to increase substantially and fundamentally in semester II/2022, mainly driven by demand-pull inflation.

The Central Statistics Agency (BPS) reported that the Consumer Price Index (CPI) in May 2022 experienced inflation of 0.40 percent monthly (month-to-month/mtm). In the current year, inflation in May 2022 reached 2.56 percent (year-to-date/YTD) and annually reached 3.55 percent (year-on-year/yoy).

Several commodities that contributed to inflation spike during this period included air transport fares, and prices for broiler eggs, fresh fish, and shallots.

Bank Mandiri economist Faisal Rachman, Thursday (2/5/2022), said, “Demand is seen increasing, especially while accelerating economic recovery, in line with increasing community mobility in line with the loosening of PPKM which increases the circulation of money.”

Furthermore, Faisal said the risk of rising inflation was also driven by cost-push inflation related to rising global food, energy, and fuel prices. This condition is in line with Producer Price Index inflation and Wholesale Price Index inflation, which have been above CPI inflation since 2020.

“The increase in inflation in these two indexes indicates that inflation risk is transmitted from the supply side to the demand side,” he added.

However, added Faisal, the government has decided to increase energy subsidies in the 2022 state budget. This indicates that the prices of subsidized fuel, LPG, and electricity will not increase in 2022.

“The decision not to increase the price set by the government [administered price] leads to a weakening of inflation risk,” said Faisal.

Therefore, according to him, the inflation rate in 2022 has the potential to be lower than the previous estimate of 4.60 percent. Faisal added that with inflation forecasts that can still be controlled, it will provide sufficient room for the benchmark interest rate [BI-7 Day Reverse Repo Rate/BI7DRR] to stay at 3.5 percent for some time.