The average 126.6 percent fuel price hike last month has pushed inflation to a six-year high of 17.89 percent for the year to October, with unemployment also rising. Surging inflation has also prompted the central bank to increase its key interest rate sharply to 12.25 percent.
Observers believe the worsening economic situation will put more pressure on the government's already beleaguered economic team prior to a possible Cabinet reshuffle. The Central Statistics Agency (BPS) reported on Tuesday that the country's Consumer Price Index (CPI) increased by 8.7 percent in October from September, or up 17.89 percent from October last year. Inflation during the 10 months has accumulated to 15.65 percent. The figures are higher than Bank Indonesia's (BI) estimate of 5 percent inflation for October and surpassed its full-year forecast of 14 percent. "This month's inflation was particularly due to the rise in transportation and fuel costs," BPS chief Choril Maksum said.
"The rise in gasoline, kerosene and diesel fuel prices contributed to 3.47 percent of October's inflation, while transportation costs were 2.08 percent and the rest were the usual inflationary pressures ahead of the Idul Fitri holiday." The BPS also reported that open unemployment in the country had increased by 1.3 million people from August last year to October, reaching 10.84 percent of the country's 106.8 million workforce. The rise was likely caused by significant lay-offs in labor-intensive industries hurt by the fuel price hikes.
In light of rising inflation, BI on Tuesday raised its benchmark BI Rate by 125 basis points to 12.25 percent, continuing its recent rate hikes within the year to contain inflation and a slumping rupiah. The rate hike caused the Jakarta Stock Exchange Index to close lower 0.12 percent to 1,064.953, while the rupiah gained 0.3 percent to Rp 10,090 against the greenback.
Upon hearing the BPS report, President Susilo Bambang Yudhoyono was shocked, presidential spokesman Andi Mallarangeng said. "President Susilo is very concerned with the inflation issue. The President and the economic ministers will take immediate measures to ease the inflation," Andi said. Andi said Susilo had instructed Coordinating Minister for the Economy Aburizal Bakrie and economic ministers to seek a clear-cut policy to contain the problem and to explain it to the public. Aburizal, however, played down the situation, saying he was upbeat that October's inflation level would be a one-off event and would ease within the year's remaining two months. He did, however, admit that full-year inflation could reach 17 percent.
The government's critics were quick to find fault with the economic team over the report. "Inflation has gone way past the real increases in fuel prices," said Rizal Ramli, who briefly served as chief economics minister under president Abdurrahman "Gus Dur" Wahid. "Prices were going up before and after the announcement of the fuel price hikes. This is another example of the Cabinet economic team's incompetence and this adds to the burdens of the people and the business world," he said.
Rizal had been considered for a top post in the Cabinet last year before Aburizal, a former business associate of Vice President Jusuf Kalla, was given the job at the last minute. Economist Dradjad Wibowo said high inflation could push the economy into another recession, blaming the government's decision to increase domestic fuel prices during a time when inflation was already under pressure, and while the rupiah remained weak.
"The real sector will surely contract further (because of the inflation), while unemployment could reach 11 percent," he said. "This is proof that arguments justifying the fuel price hike have turned out to be wrong and that the economic team has lost its credibility, if it ever had any."