Indonesia’s June inflation eases to 2.51%, below analyst forecasts

[JAKARTA] Indonesia’s consumer price index (CPI) fell to 2.51 per cent in June, largely due to declining prices of essential food items, according to data released by the country’s statistics bureau on Monday (Jul 1).

The annual inflation rate is now at its lowest level in nine months, and is within the central bank’s target range of between 1.5 per cent and 3.5 per cent.

The June figure is lower than the 2.84 per cent in May, and below the 2.65 per cent forecast by analysts in a recent Bloomberg poll. On a monthly basis, headline inflation increased to 0.08 per cent from 0.03 per cent.

Core inflation, which excludes volatile items such as fuel, decreased to 1.9 per cent from 1.93 per cent in May.

Imam Machdi, an official from Statistics Indonesia, noted that Indonesia experienced a drop in prices for food items such as chicken, garlic and eggs. The price of rice, however, went up.

Economists predict that Indonesia’s inflationary pressures will continue their downward trajectory in the coming months.

The Indonesian government is striving to control food inflation while continuing to provide social assistance to vulnerable community groups, as the lingering effects of El Nino are expected to drive up food prices this year.

With inflation remaining within the target range, Bank Indonesia (BI) said it has been able to concentrate on its efforts to stabilise the rupiah’s exchange rate, which has been weakening since the start of the year.

In a report, DBS economists anticipated that inflation will ease. This would allow BI to maintain current interest rates this year to support the rupiah, even if the US Federal Reserve begins its rate cut cycle.

Despite a consistent trade surplus for 49 consecutive months, concerns over a weakening rupiah and high public debt persist, prompting BI to maintain its benchmark interest rate at 6.25 per cent in the last meeting

Oil prices risk

Indonesia, which is heavily reliant on oil imports, faces the looming risk of escalating global oil prices.

Mohammad Faisal, the executive director of the Center of Reform on Economics Indonesia, suggested that the recent surge in world oil prices could compel Indonesia to raise fuel prices this month, potentially driving up the energy inflation rate in the future.

“The impact of this fuel price increase could limit Bank Indonesia’s ability to ease its monetary policy,” he said.

Concerns over rising fuel prices loom as the government plans to phase out fuel subsidies and compensation starting in 2025. This reform is projected to save the national budget around 67.1 trillion rupiah (S$5.6 billion) next year.

Indonesia’s long-standing practice of fuel subsidies has resulted in gasoline consumption rates that surpass the global average by 13 per cent. 

This widespread dependency means that fluctuations in fuel prices significantly impact a large segment of the population.

When the government last reduced fuel subsidies in October 2022, it triggered a substantial inflationary surge, with rates climbing nearly 18 per cent primarily as a result of this policy shift.