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Subsidized fuel price hike may put Indonesia at risk of stagflation
Economists warn that yesterday's decision to raise subsidized fuel prices could disproportionately impact lower-income households, force the central bank's hand in expanding its rate hike to double the initial assumption and propel the country into stagflation.
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A worker of a petrol station of the state-owned company Pertamina changes the fuel prices displayed after the announcement of a fuel price hike, in Bekasi, on the outskirts of Jakarta, September 3, 2022. (Reuters/Ajeng Dinar Ulfiana)
T
he government’s decision to raise the prices of subsidized fuels on Saturday might put the country at risk of stagflation and potentially hurt the spending of lower-income households, which are already struggling with weak buying power.
The government increased subsidized fuel prices around 30 percent in a move to rein in ballooning energy subsidies despite the risk of mass protests.
President Joko “Jokowi” Widodo said the decision to raise fuel prices was a difficult one, calling it his “last option”.
The state subsidy budget in Southeast Asia's largest economy has tripled in 2022 to Rp 502 trillion (US$34 billion) from its initial allocation, pushed by skyrocketing global oil prices and a depreciating rupiah.
Starting at 2:30 p.m. on Saturday, subsidized gasoline brand Pertalite was increased to Rp 10,000 rupiah (67 US cents) per liter from Rp 7,650 per liter, while subsidized diesel brand Solar was increased to Rp 6,800 per liter from Rp 5,150 per liter previously.
Executive director Bhima Yudhistira of the Center of Economics and Law Studies (CELIOS) said hiking subsidized fuel prices risked pushing the Indonesia economy into stagflation.
Also known as recession-inflation, stagflation involves high or rising inflation, slowing growth and high unemployment occurring simultaneously.
