Indonesia’s inflation eased more sharply than expected in July, strengthening the case for Bank Indonesia (BI) to keep interest rates unchanged in the near term as price pressures remained within the central bank’s target range.
According to a Kenanga Research report, Indonesia’s headline inflation slowed to 2.88% year-on-year (YoY) in July from 3.34% in June, coming in below market expectations of 3.20%. The reading marked the fifth consecutive month that inflation remained within BI’s target range of 1.5% to 3.5%.
On a month-on-month basis, consumer prices declined 0.14%, reversing June’s 0.44% increase and marking the first monthly deflation since January this year. It was also the weakest monthly inflation reading recorded in 2026, signalling easing short-term price pressures.
Despite the softer headline figure, underlying inflation remained resilient, with core inflation holding steady at 2.76%, its highest level in 39 months, indicating that domestic demand continues to support price growth.
The moderation in headline inflation was largely driven by lower food prices. Inflation in the food, beverage and tobacco category eased sharply to 2.97% from 4.67% previously as prices of key staples such as shallots, tomatoes and eggs declined.
However, transportation costs continued to climb, with inflation in the category accelerating to 5.12%, the highest level in nearly three years. The increase reflected higher prices for gasoline, airfares, engine oil, motorcycles and passenger vehicles.
Meanwhile, inflation for housing, water, electricity and other fuels edged slightly lower to 0.99%, while personal care and other services slowed to 9.04%, primarily due to weaker gold jewellery prices.
Across the region, inflation trends remained mixed. Thailand’s inflation moderated to 2.4% from 2.8%, remaining comfortably within the Bank of Thailand’s target range, while Singapore’s inflation edged up to 1.9%, reaching a 22-month high amid firmer accommodation costs and higher core inflation.
Kenanga Research maintained its 2026 inflation forecast at 3.1%, compared with 1.9% in 2025, expecting inflationary pressures to gradually build over the remainder of the year due to higher fuel prices, a weaker rupiah and resilient domestic demand.
Nevertheless, the research house said July’s softer-than-expected inflation suggested that the pass-through effects from earlier fuel price increases and the rupiah’s depreciation have been more muted than initially anticipated.
In view of the latest inflation data and the recent stabilisation of the rupiah around the 18,000 per US dollar level, Kenanga now expects Bank Indonesia to maintain its benchmark policy rate at 5.75% following its recent tightening measures.
The research house said the central bank is likely to remain cautious amid ongoing external uncertainties while prioritising exchange rate stability and ensuring inflation remains firmly anchored within its target range.
