ECONOMIC UPDATE - Inflation - August inflation eases, but upside risks persist

Volatile food and fuel drive monthly deflation

Indonesia recorded monthly deflation of -0.08% MoM in Aug-25, down from +0.30% MoM in Jul-25, and below both our forecast (+0.07% MoM) and the consensus estimate (+0.09% MoM). This marks the first monthly deflation since Feb-25. The main driver was the food, beverage, and tobacco sector, which fell -0.29% MoM and contributed -0.08 percentage points to overall deflation. Tomatoes and cayenne pepper were the largest contributors. Volatile food prices also declined -0.61% MoM, the lowest level since May-25. Administered prices also turned negative, recording -0.08% MoM in Aug-25 compared to +0.09% MoM in Jul-25, mainly due to lower non-subsidized fuel prices. Core inflation eased to +0.06% MoM (vs. +0.13% MoM in Jul-25), driven by lower education costs and gold jewelry prices. Looking ahead, the government should prepare for food price pressures following the increase in the rice ceiling price (HET).

 

Deflation in transportation sector pushes yearly inflation lower

On an annual basis, headline inflation slightly decelerated to +2.31% YoY in Aug-25, down from +2.37% YoY in Jul-25. The August reading came in below both our forecast (+2.47% YoY) and the consensus estimate (+2.49% YoY), though it remained within Bank Indonesia’s target range of 1.5–3.5%. The slowdown was mainly driven by the transportation sector, where inflation fell to -0.29% YoY in Aug-25 from +0.12% YoY in Jul-25, reflecting lower non-subsidized fuel prices and discounted airfares. In-line with this, administered prices inflation eased to +1.00% YoY from +1.32% YoY in the previous month. Core inflation also moderated slightly to +2.17% YoY in Aug-25, compared with +2.32% YoY in Jul-25, largely due to lower cell phone prices and reduced senior high school education costs. The core inflation was marginally below both our projection (+2.25% YoY) and the consensus estimate (+2.32% YoY). By contrast, volatile food inflation picked up to +4.47% YoY from +3.82% YoY in Jul-25, driven by higher prices of rice, tomatoes, and shallots.

 

Inflation risks persist, but GDP growth outlook improves to 5.0% in 2025–2026

Ytd headline inflation slowed to 1.60% in Aug-25, down from 1.68% in Jul-25, remaining within Bank Indonesia’s target range of 1.5–3.5%. The Rupiah depreciated slightly by 0.26% MoM to Rp16,500/USD, following a 25 bps BI rate cut to 5.00%. Looking ahead, we expect inflationary pressures to increase due to government’s decision to raise the rice ceiling price and the expiration of transportation discounts. Non-subsidized fuel prices may also increase, reflecting higher logistics costs from U.S. imports and persistent geopolitical tensions in the Middle East. Core inflation is likewise expected to trend upward, given Rupiah depreciation as BI has cut policy rates by a total of 100 bps this year while the Fed maintains its rate at 4.5%. The narrowing interest rate spread could spur capital outflows and place further pressure on the Rupiah. In addition, U.S. reciprocal tariffs and tighter trade requirements may reduce Indonesia’s trade surplus. Against this backdrop, we maintain our 2025 forecast for headline and core inflation at 2.5% YoY. However, we raise our economic growth projection to 5.0% YoY for both 2025 and 2026, supported by stronger-than-expected 2Q25 growth and accommodative monetary policy following BI’s rate cuts.