The Indonesian central bank on Thursday revised up its inflation forecast this year to 9.0 to 9.8 percent this year from the initial projection of 7.2 to 7.8 percent.
"The central bank forecasts inflation to be at range of 9.0 to 9.8 percent at year end," spokesman Difi A Johansyahhe said.
Aslo on Thursday, the bank raised its benchmark interest rate by 50 basis points to 7 percent as the government increased subsidized fuel prices and foods prices rose.
The spokesman said that the main contributors to the inflation pressure were volatile foods and administered prices (the prices of products controlled by the government).
The government increased subsidized fuel prices by up to 44 percent on June 22.
Indonesia is a net-oil importing country and provides a huge subsidy on fuel.
The country's inflation in July rose to 8.61 percent on a yearly basis from 5.9 percent in June.
The government has announced a package to slow growing inflation and depreciating rupiah as the country's stock market fell significantly following the decreasing injection of stimulus funds by the U.S. government.
Indonesia's currency, the rupiah, has slumped to the lowest level in four years.
Coordinating Minister for Economy Hatta Rajasa said that the government would reduce oil imports and increase import tax on luxury cars and branded products.
The Indonesian central bank has increased its benchmark interest rate by 75 basis points to 6.50 percent since June to shore up weakening rupiah against the U.S. dollar and ease inflation.