Fuel price hike triggers inflation, low output in Indonesia

Fuel price hike triggers inflation, low output in Indonesia

Monday, December 1, 2014 7:27 am

Indonesia’s inflation rate jumped and manufacturing activity sank to a record low after the country’s new president raised the price of fuel in Southeast Asia’s top economy, data showed Monday.

The 30-percent increase in the price of diesel and petrol, announced last month, was aimed at cutting government subsidies that gobble up a huge chunk of the state budget and have sparked investor alarm.

But, as expected, the move caused an immediate spike in the cost of transportation as well as basic goods, which are now more expensive to deliver.

November inflation surged to 6.23 percent year on year from 4.83 percent in October, official data from the statistics agency showed. Economists expect inflation to rise further in coming weeks but then drop back next year.

The fuel price hike also contributed to a slowdown in manufacturing activity, which had already been weakening in recent months due to falling demand, HSBC said in its Purchasing Managers’ Index for Indonesia.

The gauge fell to 48.0 in November from 49.02 in October, the lowest reading since the introduction of the measure in 2001. A reading below 50 indicates contraction, while anything above signals growing.

“The hike in subsidised fuel prices may have exacerbated things, though we note that both domestic and external demand were already moderating even before the hike,” said HSBC economist Su Sian Lim.

On a more positive note, official data released Monday showed Indonesia’s trade balance swung to a small surplus of $20 million in October from a $270 million deficit the previous month as a fall in oil prices cut the country’s import bills.

Economists have long been calling for Indonesia to reduce its generous fuel subsidies as they are blamed for a widening current account deficit, although attempts to cut them are often met with public anger.

President Joko Widodo, who took office last month, made reducing the payouts a key election pledge, and has vowed to divert the money to overhauling the country’s creaking infrastructure and programmes to help the poor

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