• Indonesias CPI inflation declined to 2.88% YoY (-0.14% MoM) in Jul-26, compared to 3.34% YoY (0.44% MoM) in Jun- 26. While some seasonal factors during the month have helped keep prices down, the deeper decline in prices could be attributed to a pause in the Free Lunch Program.
• Focusing on the monthly figures will provide some clarity regarding the seasonal forces. While volatile food prices recorded a deflation (-1.68% MoM) during July, education costs rose (0.55% MoM). These fluctuations could be explained by the start of crop harvests and the school year, respectively.
• On a yearly basis, we mainly see a deceleration in food but an uptick in transportation prices. The decelerating food inflation may be caused by the pausing of the Free Lunch program during school holidays, shutting off a significant source of demand. Meanwhile, the accelerating energy inflation could be sparked by Pertamaxs price increase on the 10th of June, meaning that the month would only record 2/3 of the inflation effect (as opposed to July, which recorded it fully).
• In contrast to the sharp decline in headline inflation, however, core inflation has stayed stable (2.76% YoY), even accelerating once we consider the fading impact of gold inflation. Combined with the still-high interbank rate during the period, its likely Julys credit growth will remain robust.
• An important question remains, however: will these disinflationary forces persist for the foreseeable future? There are reasons to remain skeptical. First, the war in the Middle East has expanded with the Houthis blockade of Bab El-Mandeb to Saudi Arabia, potentially increasing the disruption in oil supply. Second, the current El Niño climate, starting in Q3-26 is expected to last until early 2027, hampering the next planting period at a time of increased food demand. Third, Indonesia is likely to record a higher CAD this year (with Q2-26 trade deficit reaching USD 2 Bn), adding further pressure on inflation through Rupiah depreciation.
• With the still-existent upside risks to inflation, we still expect BI to act hawkish, with 1-2 more hikes this year. Indeed, the recent resignation of Mr. Perry Warjiyo from BI has resulted in additional uncertainty over BIs monetary policy trajectory, especially in balancing its multiple mandates. However, such potential pressures from inflation might compel the newly instated governor to commit to the prostability track for the time being.

Versi lengkap report ini (dan report sebelumnya) dapat diakses lewat link berikut: https://s.id/BCA_REI