Economist: Improved food supply keeps inflation under control
The slowdown in inflation in July was mainly driven by an improvement in food supply conditions, not by a broad weakening of domestic demand.
Lead Economist at Bank Danamon, Irman Faiz, stated that the deceleration in inflation was influenced by falling prices of several volatile food commodities, such as shallots, chillies, eggs, tomatoes, and several other food items. Additionally, a decline in non-subsidised fuel prices helped ease monthly pressure on administered prices, although this component remained relatively high on an annual basis due to base effects.
Statistics Indonesia reported that annual consumer price index inflation fell to 2.88 percent in July 2026, down from 3.34 percent in June 2026. Core inflation remained stable at 2.76 percent year-on-year, reflecting contained underlying inflationary pressures. Prices in the transport, restaurant, education, and personal care sectors continued to rise, indicating that domestic demand remains relatively stable.
According to the economist, the slowdown in inflation does not yet reflect a permanent disinflationary trend but is more influenced by food supply factors. The Bank Danamon review also noted that manufacturing activity improved, with the Purchasing Managers’ Index rising to 50.2 in July from 46.9 in June, returning to expansionary territory for the first time since February. The increase was supported by higher production, stable new orders, and the first addition of manufacturing workers in five months, although export demand still contracted. Meanwhile, raw material cost inflation slowed to its lowest level in four months, easing production cost pressures.
Looking ahead, inflation risks need to be anticipated, particularly from potential food supply disruptions due to weather disturbances and the possible strengthening of El Niño in the third quarter of 2026. Additionally, the implementation of the Free Nutritious Meals programme is expected to increase food demand, making the adequacy of supply and smooth distribution crucial factors in maintaining price stability. Global energy price developments also need to be monitored, as rising oil prices could drive up fuel, transport, and administered price costs.