Inflation lowest in 20 years despite increasing food prices

Indonesia hiked subsidized fuel prices in September 2022 amid a surge in the international oil price and a depreciated rupiah. This prompted inflation to peak at nearly 6 percent before gradually decreasing over time.

Deni Ghifari

Deni Ghifari

The Jakarta Post


A farmer uses a machine to plant rice seedlings on Dec. 25, 2023, in Parigi Moutong regency, Central Sulawesi. The government has been pushing for a greater use of agricultural technology to boost rice production. PHOTO: ANTARA/ THE JAKARTA POST

January 3, 2024

JAKARTA – Indonesia has logged the lowest annual consumer price index (CPI) growth in the last two decades despite a trend of increasing prices for some food commodities throughout the year, partly because of government intervention, but also favorable external conditions.

The country saw its annual inflation hover at 2.61 percent at the end of 2023, according to Statistics Indonesia (BPS) on Tuesday, which the agency noted was the lowest in 20 years, discounting figures from during the pandemic of 1.68 percent and 1.87 percent in 2020 and 2021, respectively.

The figure was well below market expectations, as Moody’s Analytics projected 3 percent and state-owned lender Bank Mandiri predicted 2.7 percent.

Acting BPS head Amalia Adininggar told reporters on Tuesday that last year’s inflation was partly the result of a base effect triggered by high inflation in the previous year. Amalia also pointed out that a similar trend also occurred in 2005, 2008, 2013 and 2015.

Indonesia hiked subsidized fuel prices in September 2022 amid a surge in the international oil price and a depreciated rupiah. This prompted inflation to peak at nearly 6 percent before gradually decreasing over time.

Higher CPI growth brought on by shocks created a high base effect in that year, which in turn would make figures in the next year seem smaller, which according to Investopedia could be perceived as a statistical distortion.

Regardless, December’s low inflation figure “is good”, especially when compared with those of other countries, said Finance Minister Sri Mulyani Indrawati.

“Indonesia is ahead [of] the curve in fighting inflationary pressure,” she said in a separate Tuesday press briefing.

The International Monetary Fund (IMF) projected in October last year that global inflation would hover at 6.9 percent in 2023, much lower than 8.7 percent in the previous year.

Last year’s inflation also fell within Bank Indonesia’s (BI) target range of between 2 and 4 percent.

Amalia pointed out that some food commodities such as rice, shallots and certain peppers still contributed the most to CPI growth for several months in a row. This included a seasonal effect caused by the Christmas and New Year’s celebrations.

Volatile food inflation is one of the components of the headline inflation figure and it constantly increased since July until reaching a peak of 7.59 percent growth in November before decreasing to 6.73 percent in December.

Finance Ministry Fiscal Policy Agency head Febrio Kacaribu said on Tuesday at a briefing that government intervention has managed to slow down inflation caused by volatile food prices.

He attributed this to a well-coordinated effort between the provincial government, BI and the central government to maintain stable food commodity prices throughout the year.

Rice, which is a staple food for Indonesia, was still the largest driver of inflation in December, contributing some 0.53 percentage points to the 2.61 percent.

To control the price of rice, the government intervened with a flurry of imports to fill its rice reserves, which it used for rice aid as well as injecting stocks in regions that experienced high price increase — popularly called “market operations”.

Private lender Bank Danamon economist Irman Faiz added that ample domestic supply, milder effects from the El-Niño climate phenomenon and declining global crude oil prices played key roles in softening December’s inflation.

“This moderation was primarily driven by moderating inflation in staple foods and declining fuel prices during the year-end festivities,” Irman said in a press statement released on Tuesday.

He went on to say that 2024’s inflation would remain manageable but noted that potential upside risks like geopolitical tensions and uncertainties stemming from OPEC+ policy directions must be acknowledged.

Private lender BCA chief economist David Sumual told The Jakarta Post on Tuesday that the downward inflation trend would continue throughout the start of the year.

“[Inflation] is still relatively okay going forward because the currency and global commodity prices remain stable,” David said.

Private lender Bank Permata chief economist Josua Pardede said in an analysis on Tuesday that the government must continue its staple food market operation in 2024, on top of optimizing distribution channels.

While inflation will likely remain manageable in the future, Indonesia must be wary of El Niño’s impacts, which are expected to linger this year.

He continued to say that the weather phenomenon might disrupt supply and could result in more volatile food inflation throughout this year’s first half, before becoming milder.

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