ECONOMIC UPDATE - Inflation - High inflation, but temporary

Food and transport drive monthly deflation

Monthly inflation slowed to -0.15% MoM in Jan-26, reversing from +0.64% MoM in Dec-25 and marking the softest reading since Feb-25. The outcome undershot both our forecast (+0.10% MoM) and market consensus (+0.06% MoM). The moderation was primarily driven by the food, beverage, and tobacco basket, which fell -1.03% MoM and contributed -0.30 percentage points to overall inflation, reflecting a sharp drop in volatile food prices (-1.96% MoM from +2.74% previously), supported by the harvest season for shallots, red chilies, and cayenne peppers. The transportation sector also eased by -0.46% MoM, as seasonal demand normalized following the Christmas and year-end school holidays and non-subsidized fuel prices declined. As a result, administered prices fell -0.32% MoM, reversing from +0.37% MoM in Dec-25. In contrast, the personal care and other services basket became the main inflation driver, rising 2.28% MoM and contributing +0.16 percentage points to inflation, largely due to higher gold jewelry prices. This also pushed core inflation slightly higher to +0.37% MoM from +0.20% MoM previously.

 

Low base effect lifts headline inflation to highest level since May-23

On an annual basis, headline inflation accelerated to +3.55% YoY in Jan-26 from +2.92% YoY in Dec-25, reaching the highest level since May-23. The reading came in below both our forecast (+3.81% YoY) and market consensus (+3.77% YoY), but slightly exceeded Bank Indonesia’s target range of 1.5–3.5% YoY. The acceleration was primarily driven by a sharp rise in housing inflation, which surged to +11.93% YoY, contributing 1.72 percentage points to overall inflation. This spike was largely due to a low base effect following the government’s 50% electricity tariff discount for households with a maximum capacity of 2,200 VA in the previous year. In line with this, administered prices increased significantly to +9.71% YoY from +1.93% YoY a month earlier. Meanwhile, the personal care and other services basket also rose to +15.22% YoY from +13.33% YoY, mainly driven by higher gold prices. Consistent with these trends, core inflation picked up to +2.45% YoY, marking the strongest pace in nine months.

 

Inflation set to rise in February, but remains under control in 2026F

Looking ahead, we expect inflation to gradually ease as the low base effect from last year’s electricity tariff discount fades. We project full-year inflation at 3.0% YoY in 2026F, still within Bank Indonesia’s target range and slightly above last year’s 2.9% YoY. That said, inflation is likely to re-accelerate in the near term, particularly in February, driven by stronger seasonal demand during Ramadan and Chinese New Year. While ample rice stocks should help limit food price pressures, food inflation is still expected to pick up. The low base effect will also persist this month, as electricity discounts were still in place in Feb-25 and Ramadan fell later in Mar-25, mechanically lifting YoY inflation.

 

Other risks include potential Rupiah depreciation due to capital outflows following MSCI’s freeze, the appointment of Thomas Djiwandono as BI’s Deputy Governor, and expectations of a wider fiscal deficit. In addition, President Trump’s nomination of Kevin Warsh as the next Fed Chair may dampen expectations of further Fed rate cuts, strengthen the U.S. dollar, and add pressure on the Rupiah, thereby increasing the risk of imported inflation.