Dynamic Spatial Modeling of Fuel Price Hikes and Their Impact on Inflation and Basic Necessities in Indonesia

Abstract

In 2022, the Indonesian government implemented a fuel price increase policy to reduce the fiscal burden of energy subsidies, a measure that has important implications for regional inflation dynamics. Given the heterogeneity of economic structures and market integration across regions, the inflationary impact of fuel price hikes is unlikely to be spatially uniform. This study aims to examine the effect of fuel price increases on regional inflation in Indonesia while accounting for spatial interaction and temporal dynamics. To this end, a Dynamic Spatial Model is employed, incorporating spatial lag dependence, spatial error dependence, and temporal persistence, with rice and cooking oil prices included as control variables to capture essential commodity price effects. The estimation results provide strong evidence of significant spatial spillover effects and dynamic adjustment processes in regional inflation. The findings indicate that fuel price increases have a statistically significant impact on inflation, with the magnitude and direction of the effects varying across regional groups, reflecting differences in cost-push and demand-pull inflation mechanisms. These results highlight the importance of considering both spatial interdependence and dynamic effects when evaluating the inflationary consequences of fuel price policies, and they offer valuable insights for regionally differentiated policy design in Indonesia.