Inflation in Indonesia

A short history of inflation in Indonesia

The Sukarno Inflation (1959 to 1966)

Indonesia went through one of the most significant inflationary periods of the twentieth century, reaching around 1,200% in 1966. It was caused by the Indonesian government spending far beyond anything it could raise in tax and covering the difference by printing money. Under the Guided Democracy declared in 1959 the state funded a large military build-up, the campaign to take western New Guinea from the Dutch and from 1963 the Konfrontasi against the formation of Malaysia, alongside prestige construction projects in Jakarta.

At the same time its capacity to produce anything was falling. Dutch enterprises had been nationalised in 1957 and 1958, and the managers and engineers who ran them left; output and export earnings fell with them. Indonesia then withdrew from the United Nations, the International Monetary Fund and the World Bank in 1965, cutting off the last external credit. The rupiah went from about 470 to the dollar in early 1962 to 50,000 by the end of 1965, and the currency was redenominated that December at a thousand to one. Stabilisation under the new government, which rejoined the international institutions and adopted a balanced budget rule, brought inflation down within a few years.

The Asian Financial Crisis (1997 to 1999)

Inflation reached 82.4% in the year to September 1998. The cause arrived from outside. Thailand abandoned its currency peg in July 1997 and investors withdrew from the region as a whole; Indonesian companies had borrowed heavily in dollars at short maturities against revenue earned in rupiah, so as the currency fell their debts grew in local terms faster than they could service them, and the banking system that had lent to them failed with them.

The rupiah, which had been managed within a narrow band, lost roughly five sixths of its value against the dollar between mid-1997 and mid-1998. For an economy importing food and industrial inputs, that fall passed almost directly into prices. President Suharto resigned in May 1998 after thirty-one years. Bank Indonesia was made independent in 1999 and adopted an inflation target in 2005.

Post-Covid Inflation (2021 to 2023)

In Indonesia, prices rose fastest in September 2022, at 6.0%. The causes of the post-Covid inflation were global in nature, beginning with the lockdowns: factories and ports closed and the shipping between them fell out of sequence, so goods took longer to make and longer to arrive. Governments had spent heavily supporting household incomes through those closures, so when restrictions lifted there was money waiting to be spent and not enough on the shelves to spend it on. Then in February 2022 Russia invaded Ukraine, disrupting two of the world's largest suppliers of wheat, fertiliser, oil and gas at once, and the cost of everything grown, heated or transported rose with them.

Because the causes were shared, so was the timing: most countries peaked within a few months of one another in late 2022. The major inflation events covers this episode and the others in more detail.