The Impact of Global Economic Shocks on Inflation and Unemployment: A Macroeconomic and Household-Level Perspective
Globalisation has made national economies increasingly interconnected, so economic crises, wars, commodity price shocks, and geopolitical conflicts occurring in one region can quickly affect inflation, employment, and household welfare in Indonesia.
Focusing on oil-price shocks and examining how global economic disturbances may alter the traditional relationship between inflation and unemployment, I summarised the results as follows:
Globalisation increases economic transmission. Events such as wars, financial crises, pandemics, or supply disruptions can spread across countries through trade, energy markets, exchange rates, and financial flows. Indonesia is therefore highly exposed to external shocks.
Indonesia is vulnerable to oil-price shocks. Although Indonesia is a major energy producer, it remains a net importer of crude oil and petroleum products. Rising global oil prices therefore increase transportation and production costs domestically, creating inflationary pressure.
Indonesia’s total petroleum and other liquids production decreased over the years, which can be attributed to several factors, including maturing fields, a lack of new exploration, and risks stemming from uncertain oil and natural gas policy.
The Phillips Curve may be unstable. Drawing on Indonesian and international literature, the paper argues that the inflation–unemployment relationship is not fixed over time. Recent studies suggest that the Phillips Curve becomes state-dependent, nonlinear, and regime-dependent during periods of major global shocks such as COVID-19 and energy crises.
In 2015, the Wall Street Journal graphed the Phillip Curve with data from 1961-2014 and supported the above argument that the relationship between inflation and unemployment is not steady.
Macroeconomic indicators may hide household stress. Despite relatively stable national indicators—moderate inflation and low unemployment—the paper shows that household-level indicators tell a different story. Consumer confidence, retail sales, and business confidence weakened in 2026, suggesting that many households still experienced financial pressure.
The Consumer Confidence Index (CCI), which provides an indication of future developments of households’ consumption and saving, shows that Indonesia's CCI fell to 120.9 in May 2026 from 123 in the previous month, marking its lowest level since September 2025.
The decline in CCI was largely driven by a weaker assessment of current economic conditions, sentiment toward purchasing durable goods, perceptions of job availability over the past six months, and income expectations for the next six months.
Household resilience depends on assets. When income falls during economic shocks, households survive by using savings, selling assets, or borrowing. The paper emphasises that asset ownership is a key buffer against economic shocks. Empirical evidence from Indonesia shows that household wealth is positively associated with education, household size, intergenerational transfers, and agricultural employment, although effects differ between urban and rural households.
Note:
Some part of this paper was presented at webinar of "The Impact of Global Economy Shocks on Inflation and Unemployment" organised by Department of Economic and Finance, Faculty of Business and Management, Universiti Teknologi MARA (UITM) Cawangan Melaka, Malaysia. Friday, 3 July 2026.
