[JAKARTA] Indonesia’s annual inflation rate eased to 1.57 per cent in December last year. Data from Statistics Indonesia on Thursday (Jan 2) also indicated that month on month, inflation edged up slightly from November.
The figure marks a historic low for the nation, said Pudji Ismartini, deputy chief statistician at Statistics Indonesia.
December’s inflation was slightly below market expectations, with a Reuters survey projecting an annual rate of 1.6 per cent.
The country’s central bank targeted inflation in 2024 and 2025 to be within the range of 1.5 and 3.5 per cent.
Analysts attributed the low inflation to a combination of subdued consumer demand in South-east Asia’s largest economy, stable global energy prices and the fading impact of weather-related food price shocks that affected the market earlier in 2024.
A series of economic stimulus measures, designed to reignite consumer spending, were unveiled at the end of last month in response.
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The statistics agency credited the subdued inflation rate to falling staple food prices in the first half of 2024 – a notable difference from the sharp price hikes of 2022 and 2023.
The price of rice eased considerably last year, after having surged in 2023 amid the El Nino-induced disruptions. The price of this staple grain for Indonesia’s 280 million people are also being buoyed by improved production and better harvest outcomes.
The annual core inflation rate, which excludes volatile food prices and government-controlled items, held steady at 2.26 per cent in December. This was unchanged from November and nearly aligned with the poll forecast of 2.28 per cent.
Brian Lee, an analyst at Maybank, expects inflation to rise slightly to 2.6 per cent in 2025, and still remain well within the target range of Bank Indonesia (BI).
“Inflationary pressures will be limited by cautious consumer demand,” he told The Business Times.
Inflation remaining at the lower end of the target range provides the central bank with more room to hold interest rates steady, as it focuses on stabilising the rupiah amid market volatility.
In their report, economists Ang Kai Wei and Rahul Bajoria from Bank of America forecast that BI will implement two rate cuts in 2025 (in Q1 and Q2), taking the end-year policy rate to 5.5 per cent, from 6 per cent.
They had previously expected the cuts to be deeper, and that the year-end rate would be 5.25 per cent after the cuts.
“However, the timing of these cuts will depend on the stability of the rupiah, with BI likely adopting a meeting-by-meeting approach,” they wrote in a note.
The central bank held its benchmark interest rate steady at its December meeting, following a rate cut in September. This was an attempt to maintain rupiah stability as it continued to hover around 16,250 rupiah per US dollar.
Muted impact on VAT hike
Indonesia wrapped up 2024 with uncertainty as the government pushed forward with a modified plan to raise the value-added tax (VAT) to 12 per cent, up from the initially planned 11 per cent.
It was to have taken effect on Jan 1, 2025, but was scaled back just hours before.
President Prabowo Subianto, said at the finance ministry’s year-end meeting on Dec 31 that the VAT rate would instead be raised to 12 per cent only on luxury goods and services already subject to the existing luxury tax, such as private jets, yachts and high-end properties.
All other goods and services would be taxed at the current rate of 11 per cent, with the exemption of 0 per cent VAT for basic necessities to remain in place, he added.
This was in response to growing public backlash, with many arguing that it was poorly timed, given the prevailing economic challenges and the growing strain on consumer purchasing power.
Maybank noted that Prabowo’s decision to exclude most everyday items from the VAT hike is unlikely to have a significant impact on inflation in 2025.
Fithra Faisal, senior economist at Samuel Sekuritas, noted that market sentiment remains positive, driven by optimism about a more stable macroeconomic environment heading into 2025, supported by a pickup in consumer demand and manufacturing activity.
This upbeat outlook, alongside stronger domestic and external demand, sets the stage for a more sustained recovery in the manufacturing sector.
“However, ongoing inflationary pressures and supply chain disruptions could moderate the pace of growth,” he cautioned.
