JAKARTA – The conflict in the Middle East and shipping disruptions in the Strait of Hormuz are not only triggering concerns over global oil supplies. The impact is spreading much further, affecting energy prices, fertilizers, and food, as well as interest rates, public purchasing power, and corporate investment decisions.
For Indonesia, the issue is no longer just whether these upheavals will have an impact, but how deeply this global pressure will affect the national economy.
Geopolitical uncertainty has now become a powerful external factor in shaping the expectations of consumers, businesses, and financial markets.
The International Monetary Fund (IMF) notes that the Geopolitical Risk Index in March 2026 is again approaching levels seen at the start of the Russia-Ukraine conflict in 2022. At that time, the surge in energy and food prices quickly spread to various countries.
Such uncertainty makes economic decision-making more difficult. Households must determine whether to continue spending or increase savings, while companies face the choice between continuing expansion or delaying investment until the situation becomes clearer.
Energy and Food Dragged Along
The Strait of Hormuz is one of the most important energy shipping lanes in the world. When this route is disrupted, pressure on global commodity markets intensifies.
The World Bank estimates that energy prices will surge by approximately 24 percent in 2026, marking the largest increase since the Russian invasion of Ukraine in 2022. Shipping disruptions are also said to have triggered a major shock to oil supplies, with an initial reduction in global supply of about 10 million barrels per day.
Meanwhile, the IMF projects that crude oil prices will increase by about 32 percent and natural gas by 22 percent compared to 2025.
The impact does not stop at the energy sector. Fertilizer is one of the strongest transmission channels to the food sector.
About 30 percent of global fertilizer trade passes through the Strait of Hormuz, while natural gas is a critical raw material for producing nitrogen fertilizer.
Urea prices were recorded at over 850 US dollars per ton in April 2026, an increase of about 80 percent since February and reaching the highest level since April 2022.
The Food and Agriculture Organization (FAO) of the United Nations estimates that a decline in fertilizer availability could potentially affect the production of wheat, corn, and rice in the following six to nine months.
FAO Chief Economist Máximo Torero explained that farmers are facing cost pressures from two directions simultaneously: expensive fertilizer and rising fuel costs, which affect agricultural activities from irrigation to distribution.
The process can be gradual. Rising energy prices increase the cost of fertilizer and agricultural production. Higher costs then affect crop yields and commodity prices before finally being passed on to consumers in the form of food inflation.
The FAO Food Price Index in April 2026 averaged 130.7 points, an increase of 1.6 percent compared to March and the highest level since February 2023.
Ultimately, consumers are the ones who bear the rising costs throughout the supply chain.
World Bank Chief Economist Indermit Gill described this pressure as a chain reaction that begins with energy, moves toward food, and eventually results in higher inflation.
Low-income groups are among the most vulnerable because a large portion of their income is used to meet food and energy needs.
Monetary Policy Space Increasingly Narrow
The price surge is also changing expectations regarding global monetary policy.
Markets are no longer just talking about the possibility of interest rate cuts in several developed countries. In conditions where inflation is under renewed pressure, high interest rates may potentially persist for longer.
For developing countries like Indonesia, this situation creates its own challenges. Attractive yields in developed countries can encourage investors to shift funds toward assets considered safer.
As a result, capital outflows may increase, the exchange rate comes under pressure, and the cost of importing energy and food becomes more expensive.
Economist Hélène Rey explained in 2013 that United States monetary policy can drive a global financial cycle that affects various countries.
According to Rey, this condition is more accurately described as a “dilemma” rather than a “trilemma.” This means that even when a country uses a floating exchange rate system, the independence of its monetary policy space can still be limited by the movements of the global financial cycle.
Central banks in developing countries ultimately face difficult choices.
Lowering interest rates can help economic growth, but at the same time, it risks increasing capital outflows and worsening imported inflation.
The experience of the taper tantrum in 2013, when Indonesia was briefly included in the group of countries known as the Fragile Five, serves as a reminder of these risks.
Another issue that must be anticipated is the emergence of inflation that becomes increasingly entrenched in public expectations.
When the public and businesses believe that prices will continue to rise, workers may demand wage increases while companies raise prices early to anticipate rising costs.
In such conditions, inflation that initially stems from external shocks can become more difficult to control.
Frederic Mishkin’s thinking places the credibility of the central bank in managing inflation expectations as one of the foundations of price stability.
Meanwhile, Blanchard and Galí found in 2007 that the impact of oil shocks in the 2000s was milder than in the 1970s, partly because inflation expectations were better anchored.
Economic Growth Also Under Pressure
Geopolitical pressure also has consequences for global economic growth.
The IMF projects that global economic growth will slow to about 3.0 percent in 2026 before increasing again to 3.4 percent in 2027. This figure is lower than the average growth of 3.5 percent during 2024–2025.
The volume of world trade is also projected to slow from about 5.0 percent in 2025 to 3.5 percent in 2026.
IMF Chief Economist Pierre-Olivier Gourinchas assessed that the world economy was previously moving toward a relatively stable growth path of about 3.3 percent before the conflict in the Middle East disrupted that momentum.
For Indonesia as an open economy, a slowdown in global trade could mean weakening demand for export products.
The OECD lowered its 2026 economic growth projection for Indonesia to 4.8 percent from the previous 5.0 percent, taking into account rising energy prices and increasing geopolitical risks.
Indonesia’s trade surplus in February 2026 was also below market expectations as exports weakened and imports grew by double digits, which was partly influenced by rising energy costs.
The IMF assesses that risks to the global economic outlook still tend to be on the downside.
In a more severe scenario, if energy supply disruptions last until the following year, world growth could fall to the 2 percent range while inflation could exceed 6 percent.
The projected recovery in growth to 3.4 percent in 2027 does open the possibility of improved export demand. However, that opportunity depends heavily on the development of the conflict and global economic stability.
How Do Consumers and Companies React?
Economic theory helps explain why uncertainty can have a major impact even if income or sales have not yet changed.
Households and companies do not just look at current conditions. They also try to estimate whether the changes occurring are temporary or will last in the long term.
The permanent income hypothesis introduced by Milton Friedman in 1957 states that household consumption decisions are influenced more by their long-term expected income than by current income.
When uncertainty increases, people tend to be more cautious.
Carroll showed in 1997 that households may increase precautionary savings when facing higher uncertainty.
Inflation then reinforces this pressure because basic needs absorb an increasingly larger portion of income. As a result, spending on non-essential needs may be reduced.
This condition is important for Indonesia because household consumption accounts for about half of the national gross domestic product.
Companies face similar issues.
Bernanke in 1983, as well as Dixit and Pindyck in 1994, explained that investments are often difficult to reverse once made. Therefore, in highly uncertain situations, waiting for additional information has its own economic value.
Bloom showed in 2009 that a surge in uncertainty can prompt companies to hold back on investment and hiring.
Research by Dissanayake and his colleagues in 2018, as well as Wang and his colleagues in 2023, also found that the decline in investment tends to be greater for investments that are difficult to reverse and for companies facing liquidity constraints.
Conversely, companies with stronger cash reserves have a greater ability to continue their investments.
For a company, waiting might be a rational choice. However, if many companies do the same thing simultaneously, the impact can be seen in a slowdown in job creation and economic growth.
Tufaner and Sözen noted in 2025 that geopolitical risks and policy uncertainty have a significant negative impact on gross domestic product growth.
Nevertheless, uncertainty does not always make all companies stop moving. A study by Sakwaya and his colleagues in 2025 showed that some companies actually see these conditions as an opportunity to innovate.
Expectations Can Be Economic Drivers
Expectations have an important position in determining the direction of the economy.
John Maynard Keynes introduced the term animal spirits in 1936 to describe the optimism or pessimism that can influence investment decisions and is not always based entirely on rational calculations.
Akerlof and Shiller also emphasized in 2009 how confidence can drive economic cycles.
Therefore, expectations have the potential to turn into self-fulfilling prophecies.
When households and companies both expect economic conditions to worsen and simultaneously cut spending and investment, the weakening they fear can actually happen.
Baker, Bloom, and Davis found in 2016 that high policy uncertainty is associated with lower levels of investment and employment.
In Indonesia, domestic data shows a household buffer space that needs attention.
A Bank Indonesia survey in August 2026 noted that the portion of public income used for consumption increased to 74.2 percent. At the same time, the portion of income saved fell to 15.8 percent from the previous 16.8 percent.
Bank Indonesia sees this development as a sign of improving consumer confidence.
However, from the perspective of household resilience, a smaller portion of savings also means that the cushion to face shocks is more limited. If the prices of basic necessities rise again, non-essential spending may be the first to be reduced.
Ensuring Shocks Do Not Become Permanent
The surge in oil prices is an example of a supply-side shock. Its direct impact can be temporary if it does not develop into a second-round effect second-round effect.
Problems arise when cost increases begin to be passed on to wages, service prices, and various other economic components.
In Indonesia, core inflation in August 2026 was recorded to have risen moderately to 2.92 percent annually. Meanwhile, volatile food inflation reached 4.06 percent, partly influenced by El Niño conditions.
PermataBank economist Faisal Rachman estimates that Indonesia’s inflation at the end of 2026 will be around 3.13 percent, assuming subsidized energy prices do not change.
However, an escalation of the conflict in the Middle East and a stronger El Niño could bring inflation to a higher level.
The impact of rising food prices is not felt evenly.
The World Bank notes that the portion of spending on food varies greatly between countries, ranging from about 6.7 percent of household spending in the United States to about 59 percent in Nigeria.
This phenomenon is in line with Engel’s Law, which states that the lower a household’s income, the greater the proportion of income used to meet food needs.
This means that a surge in the prices of basic necessities puts much heavier pressure on low-income groups.
Indonesia also faces risks from the domestic supply side. A study by Fajri, Siregar, and Sahara in 2019 found that El Niño significantly increased the prices of rice and soybeans in the most affected Indonesian provinces.
Policy Clarity is Key
In a situation full of uncertainty, the government and central bank are not only required to take the right policies but also to be able to communicate the direction of those policies clearly.
Bernanke emphasized in 2007 that managing public expectations is an important part of modern monetary policy.
Tufaner and Sözen also assessed in 2025 that predictable macroeconomic policies play a role in supporting sustainable growth.
Consistent communication, credible inflation targets, and policies that do not change abruptly can help maintain the expectations of the public and the business world.
For Indonesia, certainty regarding subsidized fuel price policies, the effectiveness of market operations, coordination of inflation control between the central and regional governments, and the stabilization of basic commodity prices are important parts of facing external pressures.
Global geopolitical uncertainty cannot be eliminated by Indonesia. However, its impact on consumer and corporate behavior can still be managed.
When the public and businesses have confidence that price shocks are only temporary and the government has sufficient instruments to maintain stability, the tendency to hold back consumption or investment can be suppressed.
Ultimately, maintaining expectations is just as important as maintaining economic indicators themselves.
In the midst of a volatile world, certainty in policy direction, stability in basic commodity prices, and readiness to face rising energy and food costs are key to ensuring that Indonesia’s consumption, investment, and economic activities continue to move.
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