Jokowi’s Fear: VAT, BBM, and Staple Foods Cause Inflation to Skyrocket


Previously, the President of Indonesia, Jokowi, was worried that there would be massive inflation due to the increase in VAT, fuel, and staple foods in Indonesia. The president’s fear turned out to be true with the increase in the several goods price.

The several commodities price increase was in fact above the expectations of the government and Bank Indonesia. As of March 2022, based on the Central Statistics Agency (BPS) report, Indonesia’s inflation has reached 2.6% on an annual basis (year on year/yoy) and 0.6% every month.

The additional inflation was caused by the government’s policy of increasing the value-added tax (VAT) rate to 11%, the increase in the price of Pertamax fuel oil (BBM), and possibly the increase in pertalite, LPG and electricity rates.

David Sumual, Economist of Bank BCA, sees that international commodity and food prices are still quite high until the end of semester I-2022. Unless the war continues, price increases will follow.

He added that some commodity prices are difficult to predict, and some are even unpredictable.

From the increase in VAT alone, David added that it seems that the business world can no longer hold back the price of goods. Moreover, it is known that the Producer Price Index has experienced a significant increase in recent times to 109.27.

“Most producers take advantage of the momentum of the increase in VAT to raise prices,” explained David.

Food is still a threat, although rice is under control. According to David, the foodstuffs circulating in the market are products produced at the end of last year. Meanwhile, since the beginning of the year, there has been an increase in fertilizer prices, so it is possible to push up food prices again.

Furthermore, high inflation will make Bank Indonesia (BI) raise its benchmark interest rate. David sees an increase of 50 bps this year so that the BI 7 days reverse repo rate reaches 4%.

When monetary tightening occurs, it has previously been started with the normalization of the Statutory Reserves (GWM), which will quickly be followed by an increase in bank lending rates. Then the economic growth will also be affected.

In the research of the Economic Team of PT Bank Mandiri Tbk, every 1% increase in inflation will make the economy decrease by 0.21%. Last year, inflation was realized at 1.87%, and 2022 is estimated to reach 4.17% or above BI’s estimate of 2-4%.

Indonesia’s economic growth in 2022 is estimated to reach 5.17%, lower than the previous projection but still higher than the realization in 2021 which reached 3.69%.