ECONOMIC UPDATE - Inflation - July inflation picks up, with further upward pressure ahead

Inflation accelerates on seasonal education costs and food prices

Indonesia’s monthly inflation accelerated to +0.30% MoM in Jul-25, up from +0.19% MoM in Jun-25, exceeding both our forecast (+0.27% MoM) and the consensus estimate (+0.23% MoM). This marks the highest monthly inflation rate since Dec-24. The primary driver was a sharp increase in the education sector, which rose +0.82% MoM and contributed +0.05 percentage points to overall inflation. This uptick was mainly due to seasonal factors, particularly the start of the new academic year. The Food, Beverages, and Tobacco sector also recorded notable gains, rising +0.74% MoM, driven by a sharp increase in volatile food prices, which surged +1.25% MoM in Jul-25—the highest level since Jan-25. Meanwhile, administered prices rose +0.09% MoM in Jul-25, similar pace with previous month, largely reflecting higher non-subsidized fuel prices. Core inflation edged up to +0.13% MoM (vs. +0.07% in Jun-25), likely reflecting the 1.34% MoM depreciation of the Rupiah to Rp16,455/USD following BI’s 25 bps rate cut to 5.25%. Looking ahead, the government should anticipate further increases in non-subsidized fuel prices. This is due to the recent decision to shift fuel imports from Singapore to the U.S., which could raise logistics costs and exert additional upward pressure on fuel prices.

 

Annual inflation climbs, but core and administered prices ease

On an annual basis, inflation accelerated to +2.37% YoY in Jul-25, up from +1.87% YoY in Jun-25, marking the highest level since Jun-24. The July figure exceeded both our forecast (+2.31% YoY) and the consensus estimate (+2.26% YoY), though it remained within Bank Indonesia’s target range of 1.5–3.5%. The acceleration was primarily driven by the Food, Beverages, and Tobacco sector, where inflation surged to +3.75% YoY in Jul-25 from +1.99% YoY in Jun-25. Volatile food inflation also rose sharply to +3.82% YoY, up from just +0.57% YoY in the previous month. This spike was mainly due to rising prices of rice, tomatoes, and shallots. In contrast, core inflation eased slightly to +2.32% YoY in Jul-25, compared to +2.37% YoY in Jun-25. This was marginally below both our projection of +2.34% YoY and the consensus estimate of +2.36% YoY, mainly due to declining gold prices. Meanwhile, administered prices inflation also decelerated slightly to +1.32% YoY in Jul-25 from +1.34% YoY in Jun-25. This was mainly due to government stimulus measures, including toll road and public transportation discounts. In line with this, inflation in the transportation sector eased to +0.12% YoY in Jul-25 from +0.15% YoY in the previous month.

 

Rising inflation risks in 2H25 on fuel costs and weak rupiah

Year-to-date (YtD) inflation rose to 1.69% in Jul-25, up from 1.39% YtD in Jun-25. Volatile food inflation accelerated to 3.42% YtD from 2.17% YtD previous month, while administered prices and core inflation increased to 1.22% YtD and 1.38% YtD, respectively from 1.13% YtD and 1.24% YtD. We expect inflationary pressures to continue as temporary government subsidies on toll roads and public transport expire. Non-subsidized fuel prices may also rise due to higher logistics costs from U.S. imports and ongoing geopolitical tensions in the Middle East. Core inflation may trend higher, reflecting Rupiah depreciation as BI has cut rates by a total of 75 bps this year, while the Fed maintains its policy rate at 4.5%. The narrowing interest rate spread could trigger capital outflows and further weaken the Rupiah. Moreover, U.S. reciprocal tariffs and tighter trade requirements may narrow Indonesia’s trade surplus. Given these headwinds, we maintain our 2025 forecast for headline and core inflation at 2.5% YoY.