📈 economics

Inflation in Indonesia: Determinants, Macroeconomic Consequences, Forecasting Approaches, and Policy Implications: A Systematic Mini Literature Review

This systematic mini literature review synthesizes evidence from ten studies to characterize Indonesian inflation as a complex, regionally heterogeneous phenomenon driven by monetary and fiscal variables, exchange rate dynamics, and food supply shocks, which exerts nonlinear effects on growth and inequality, thereby necessitating a coordinated, adaptive, and regionally differentiated policy framework.

Original authors: Terbit Mahardika Herlambang, Moses Glorino Rumambo Pandin

Published 2026-07-01

📖 5 min read🧠 Deep dive

CC BY 4.0

Original authors: Terbit Mahardika Herlambang, Moses Glorino Rumambo Pandin

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine Indonesia's economy as a massive, sprawling archipelago of 17,000 islands. Now, imagine inflation not as a single, uniform wave, but as a complex weather system affecting each island differently. This paper is like a weather report that looks at ten different studies to understand why the "prices" (the weather) are changing, how it hurts or helps the people living there, and how we might predict the next storm.

Here is the breakdown of what the paper found, using simple analogies:

1. What Drives the Price Hikes? (The Determinants)

Think of the economy as a giant bathtub.

The Water Supply (Money Supply): The study found that if you turn on the faucet too fast (printing more money), the water level (prices) always rises. It's a one-way street: more money leads to higher prices, not the other way around. This means the Central Bank (Bank Indonesia) holds the faucet handle, and they must be very careful not to let the water overflow.
The Government's Spending: When the government spends a lot of money on building roads or social programs, it's like adding hot water to the tub. It pushes prices up.
The Exchange Rate (The Foreign Window): Indonesia imports a lot of things. The paper says the value of the Indonesian Rupiah is the "single most influential" outside force. If the Rupiah gets weaker (like a leaky bucket), the cost of imported goods (like fuel or food) shoots up immediately, pushing local prices higher.

2. Is Inflation Bad for Growth? (The Threshold)

Is high inflation always a disaster? Not exactly. The paper suggests it's like driving a car.

The Speed Limit: If you drive a little fast (low inflation), you get to your destination (economic growth) quickly. But there is a "speed limit." The study found that if inflation goes above 9.59% nationally, the engine starts to sputter, and growth slows down.
Different Roads for Different Drivers: Here is the twist: The speed limit isn't the same everywhere.
- Western Indonesia (Java/Sumatra): These are the busy, developed highways. They get damaged if they go too fast. Their speed limit is lower (around 5.75%).
- Eastern Indonesia: These are rougher, more rugged roads. They can handle a bit more speed before breaking down (up to 9.64%).
- The Takeaway: A "one-size-fits-all" national speed limit might be too strict for the East and too loose for the West.

3. Who Gets Hurt the Most? (Inequality and Poverty)

Inflation acts like a sneaky thief that steals differently from the rich and the poor.

The Rich: They often own houses, stocks, or gold. When prices go up, the value of these things usually goes up too. They are safe.
The Poor: They keep their money in cash or savings accounts. When prices go up, that cash buys less. The thief steals their purchasing power.
The Result: As inflation rises, the gap between rich and poor gets wider. The paper also notes that while economic growth helps lift people out of poverty, it doesn't always stop the gap between rich and poor from growing.

4. The "Food Ripple" Effect (Regional Dynamics)

Imagine dropping a stone in a pond; the ripples spread out.

Food is the Stone: The study found that food prices are the main thing causing price ripples across the islands. If the price of rice spikes in one province, it doesn't stay there. It ripples out to neighboring provinces through trade and transport.
The Clustering: Inflation doesn't happen in isolation. Provinces that are neighbors tend to have similar inflation patterns because they are connected by roads and markets. This means fixing inflation in one city might help the next city, but a problem in one city can hurt the next one too.

5. Can Computers Predict the Storm? (Forecasting)

Scientists tried using advanced AI (like LSTM and ANN neural networks) to predict future inflation, similar to how meteorologists use supercomputers to predict hurricanes.

The Result: The AI is good, but not perfect. It can see patterns in the past data, but it struggles when a "once-in-a-lifetime" storm hits (like a sudden global crisis).
The Error: The computer's predictions were off by about 15% on average. It's a helpful tool, but it can't replace human judgment, especially when the world changes suddenly.

6. The Pandemic "V-Shape" (COVID-19)

When the pandemic hit, food prices did something strange: they made a V-shape.

The Drop: At first, prices crashed because people couldn't move, and demand stopped.
The Spike: Then, as the government pumped money into the economy to help people recover, and global food prices surged, prices shot back up sharply.
The Lesson: Government spending helped the economy recover, but it also kept food prices high for a long time. The paper warns that the rules for how money moves through the economy changed during the pandemic and didn't go back to normal immediately.

The Big Picture Conclusion

To keep Indonesia's economy healthy, the paper suggests we need a tailored approach:

Watch the Faucet: Keep money supply disciplined.
Different Speed Limits: Acknowledge that the East and West have different economic "speed limits" for inflation.
Fix the Roads: Improve food supply chains so price spikes in one place don't ripple out to hurt everyone else.
Protect the Poor: Since inflation hurts the poor more, we need social safety nets that automatically kick in when food prices rise.
Mix the Tools: Use both old-school economics and new AI tools to forecast the future, but remember that AI can't predict every surprise.

In short, managing inflation in Indonesia isn't about turning a single dial; it's about steering a massive, diverse ship through changing weather, making sure the cargo (food) reaches everyone, and protecting the passengers who can't afford the storm.