ECONOMIC UPDATE - Inflation beats expectations, outlook revised higher

Inflation picks up on food, gold, and tobacco

Monthly inflation rebounded to +0.21% MoM in Sep-25, reversing Aug-25’s -0.08% deflation and coming in above both our forecast (+0.13% MoM) and consensus (+0.10% MoM). The main driver was the food, beverage, and tobacco sector, which rose +0.38% MoM and contributed 0.11 percentage points to overall inflation. Within this sector, red chili was the largest contributor. Moreover, personal care and other services sector also increased +1.24% MoM, adding 0.08 percentage points, with jewelry gold as the main driver. Consistent with this, volatile food inflation rebounded to +0.52% MoM (vs. -0.61% in Aug-25), while core inflation accelerated to +0.18% MoM (vs. +0.06% prior). Meanwhile, administered prices also rose to +0.06% MoM from -0.08% MoM, mainly due to higher prices of machine-made kretek cigarettes (SKM) and hand-rolled kretek cigarettes (SKT).

 

September inflation accelerates; 2025 forecast raised to 2.7%

On an annual basis, headline inflation accelerated to +2.65% YoY in Sep-25 (vs. +2.31% in Aug-25), above our forecast (+2.57%) and consensus (+2.50%), though it remained within Bank Indonesia’s target range of 1.5–3.5%. The acceleration was mainly driven by the personal care and other services sector, where inflation rose to +9.59% YoY in Sep-25 (vs. +8.66% YoY in Aug-25), reflecting higher jewelry gold prices. Consistent with this, core inflation also edged up to +2.19% YoY in Sep-25 (vs. +2.17% YoY in Aug-25), above both our projection (+2.18% YoY) and the consensus estimate (+1.90% YoY). Looking ahead, we expect gold prices to continue rising, supported by the Fed’s dovish stance, the risk of a potential US government shutdown, and escalating geopolitical tensions. Additionally, inflation is expected to pick up toward year-end, driven by higher consumption during Christmas festivities and the student holiday period. Taking these factors into account, we revise our 2025 inflation projection from 2.5% YoY to 2.7% YoY.

 

Policy easing and external shifts weigh on Rupiah

We anticipate the Fed to cut rates by 75bps to 3.75% in 2025 and by an additional 25bps to 3.50% in 2026 in response to a soft labor market and slower US economic growth. Bank Indonesia is also projected to lower the BI rate by 150 bps to 4.50% in 2025 and a further 25 bps to 4.25% in 2026, reflecting a pro-growth stance amid a globally dovish monetary environment. Alongside policy easing, a higher fiscal deficit amid potential revenue shortfalls and a narrowing trade surplus due to moderating commodity prices and the US reciprocal tariff are expected to exert downward pressure on the Rupiah. We project the Rupiah to depreciate on average from Rp16,470/USD in 2025 to Rp16,800/USD in 2026. A weaker Rupiah could add to imported inflation pressures. Geopolitical tensions in the Middle East and Eastern Europe are also expected to persist, while compliance with the US reciprocal tariff—such as mandatory purchases of US energy and agricultural products—may increase logistics costs. Against this backdrop, we project inflation to rise from 2.7% YoY in 2025 to 2.9% YoY in 2026.

 

Growth resilience in 2025–2026 supported by accommodative policies

Despite these headwinds, we revise up our growth forecast to 5.0% in 2025 and 5.1% in 2026. The outlook is supported by accommodative monetary policy and expansionary fiscal measures, which should sustain household consumption, investment, and government spending despite external challenges.