Monthly deflation expected to continue this month amid stimulus
According to Statistics Indonesia (BPS), Indonesia recorded a monthly deflation rate of -0.37% MoM in May-25, marking a reversal from the inflationary trend observed since March. This deflation was slightly deeper than both our projection of -0.27% MoM and the consensus forecast of -0.14% MoM. The main driver of May’s deflation was a sharp decline in prices within the Food, Beverages, and Tobacco sector, which fell by -1.40% MoM, contributing -0.41 percentage points to the overall monthly inflation figure. The decline was largely seasonal, following Eid al-Fitr, which typically brings post-holiday price corrections. As a result, volatile food prices dropped further by -2.48% MoM in May-25, compared to -0.04% MoM in Apr-25. Administered prices also decreased by -0.02% MoM in May-25, reversing sharply from +5.21% MoM in Apr-25, mainly due to declines in non-subsidized fuel prices. Meanwhile, core inflation softened to +0.08% MoM in May-25 (vs. +0.31% MoM in Apr-25), driven primarily by Rupiah appreciation. Looking ahead, we expect monthly deflation to persist this month, supported by the government’s planned stimulus package, including discounts on public transportation, toll roads, and electricity. However, other measures such as additional allocations for social assistance and wage subsidies may potentially limit the extent of monthly deflation.
Annual inflation slows below expectations but stays within BI’s target range
Indonesia’s annual inflation rate decelerated to +1.60% YoY in May-25 (vs. +1.95% YoY in Apr-25), but remained at Bank Indonesia’s target range of 1.5–3.5% YoY. The May figure was also lower than our estimate of +1.70% YoY and the consensus forecast of +1.87% YoY. We attribute this slowdown mainly to the Food, Beverages, and Tobacco sector, where prices decelerated to +1.03% YoY in May-25, from +2.17% YoY in Apr-25, reflecting the seasonal price correction following Eid al-Fitr. This aligns with the deflation in volatile food prices, which fell to -1.17% YoY in May-25 (vs. +0.64% YoY in Apr-25). Meanwhile, core inflation also eased to +2.40% YoY in May-25 (vs. 2.50% YoY in Apr-25), slightly below our estimate of 2.45% YoY and the consensus forecast of 2.50% YoY. The softening in core inflation was primarily driven by the Personal Care and Other Services sector, which decelerated to 9.25% YoY in May-25, down from 9.93% YoY in Apr-25. On the other hand, administered prices rose to 1.36% YoY in May-25, up from +1.25% YoY in the previous month, largely due to the termination of toll and public transportation discounts.
Maintaining inflation outlook at 2.5% YoY
Indonesia’s headline inflation and volatile food price rates decelerated to +1.19% YtD and +1.37% YtD in May-25, respectively, down from +1.56% YtD and +3.95% YtD in Apr-25. Additionally, administered prices slightly eased to +1.04% YtD, compared to +1.06% YtD in the previous month. In contrast, core inflation slightly accelerated to +1.18% YtD in May-25, up from +1.10% YtD in Apr-25. Looking ahead, we expect inflation to gradually rise after August as the impact of government discounts fades. Administered prices may rebound further, especially if the government decides to limit subsidized fuel. We also anticipate an uptick in core inflation, driven by rising gold prices amid global uncertainty. Meanwhile, volatile food prices may stay elevated, partly due to the rollout of the free nutritious meal program and ongoing climate risks. Additionally, a BI-rate cut and a reduction in the macroprudential liquidity buffer could stimulate credit growth, potentially adding to inflationary pressures. Considering these risks, we maintain our full-year 2025 forecasts for both headline and core inflation at 2.5% YoY.
