Controlled Inflation and Monetary Policy Credibility

Inflation is often understood simply as the rise in prices of goods and services felt by the public in daily life. However, from a modern monetary policy perspective, inflation is actually a key indicator reflecting a country’s economic stability. Therefore, when Bank Indonesia announced that the July 2026 Consumer Price Index remained within the target range of 2.5±1 per cent, this achievement deserves more attention than just a monthly statistical update.

Based on data from the Central Statistics Agency, the July 2026 CPI experienced a monthly deflation of 0.14 per cent, while annual inflation was recorded at 2.88 per cent, lower than the June 2026 realisation of 3.34 per cent. Amidst persistent global warming due to geopolitical dynamics and reflections of global commodity prices, this achievement demonstrates that price stability in Indonesia remains well maintained.

This success did not happen by chance. Inflation that stays within the target is the result of consistent Bank Indonesia policy implemented through the Inflation Targeting Framework, as well as strong synergy between Bank Indonesia and the Government via the Central and Regional Inflation Control Teams. In this context, controlled inflation is not merely a policy objective, but a reflection of the monetary authority’s maintained credibility in guiding the expectations of the public and economic actors.

Since the implementation of the Inflation Targeting Framework, Bank Indonesia has placed price stability as the primary objective of monetary policy. Within this framework, the success of a policy is measured not only by the current level of inflation, but also by the central bank’s ability to keep public inflation expectations aligned with the established target. In practice, inflation expectations play a very important role. When businesses are confident that inflation will remain under control, they will not make excessive price adjustments. Similarly, the public will not be driven to make excessive purchases out of fear that prices will surge in the future. This condition creates a more sustainable economic stability.

The July 2026 inflation developments show that this mechanism is working well. Core inflation, which is an indicator of fundamental price pressures, was recorded at 2.76 per cent year-on-year, stable compared to the previous month. On a monthly basis, core inflation was only 0.14 per cent, lower than the 0.23 per cent recorded in June 2026. The stability of core inflation sends an important message that inflationary pressures originating from the demand side remain well maintained. This condition also shows that public and business inflation expectations remain anchored despite high global commodity prices. Within the Inflation Targeting Framework, this achievement is an important indicator that the credibility of Bank Indonesia’s monetary policy remains strong.

This credibility is the most valuable asset for a central bank. When the public trusts that Bank Indonesia is capable of keeping inflation on target, the effectiveness of monetary policy increases. This trust ultimately creates the certainty needed by the business world, investors, and the public to carry out economic activities more productively.

Although monetary policy plays a very important role, Indonesia’s experience shows that inflation cannot be controlled solely through interest rate instruments. One characteristic of inflation in Indonesia is the significant influence of volatile food prices on overall price movements. Data for July 2026 shows that the volatile food group experienced a monthly deflation of 1.68 per cent, a reversal from the previous month’s inflation of 0.14 per cent. This deflation was mainly influenced by the decline in prices of shallots, cayenne pepper, and red chillies, driven by increased supply from production centres. On an annual basis, volatile food inflation dropped significantly from 5.58 per cent to 2.52 per cent.

These developments demonstrate the effectiveness of the synergy between Bank Indonesia, the Central Government, Regional Governments, and the Central and Regional Inflation Control Teams in maintaining supply and price stability. The implementation of the National Food Security Programme and the Movement for Inflation Control and Food Welfare also contributed to maintaining the balance between supply and demand for strategic food commodities. Meanwhile, the administered price group still recorded inflation of 3.58 per cent year-on-year, slightly higher than the previous month’s 3.42 per cent. This inflation was influenced by the adjustment of non-subsidised fuel prices. This development shows that price pressures from the energy sector still need to be closely monitored, especially if global turmoil triggers another increase in world energy prices.

Overall, however, the July 2026 inflation structure shows a healthy condition. Core inflation is stable, food inflation is declining, and overall inflation remains within the established target. This combination provides greater room for the economy to continue growing without being overshadowed by the risk of excessive price increases. The success in maintaining inflation at 2.88 per cent not only shows that price stability is well preserved, but also serves as evidence that the Inflation Targeting Framework implemented by Bank Indonesia is operating effectively.