Higher inflation in October. Headline inflation rose sharply to 2.9% y-o-y in October from 2.7% in September, against expectations of moderation (Mansek and consensus: 2.6%) (Exhibit 1), driven mainly by personal care and other services. On a monthly basis, CPI increased 0.3% m-o-m, up from 0.2% in September, reflecting stronger personal care and other services inflation at 3.1% m-o-m (vs. 1.2% previously). Consequently, core inflation edged up to 2.4% y-o-y from 2.2%, against expectations of a stable outturn.

Higher core inflation. Core inflation rose by 0.4% m-o-m, up from 0.2%, implying 2.4% y-o-y from 2.2%. Personal care and other services accelerated to 11.9% y-o-y from 9.6%, driven by higher gold prices. Excluding gold, core inflation however rose less sharply to 1.9% y-o-y from 1.8% in September (Exhibit 2). Other core components, including household equipment, education, and health, also increased, suggesting improving demand, while F&B restaurant prices eased, partially offsetting the gain (Appendix).

Stable food but higher transport inflation. F&B and tobacco inflation remained steady at 5.0% y-o-y, with monthly inflation easing to 0.1% m-o-m from 0.4% in September. As expected, higher prices of red chili, chicken meat, and eggs were partly offset by declines in red onion, cayenne pepper, and rice (Exhibit 3). Transport reported monthly inflation of 0.1% m-o-m, up from -0.02% in September, implying 0.5% y-o-y from -0.1%, reflecting higher non-subsidized fuel and diesel prices (Exhibit 4).

We maintain the lower inflation forecast for 2025. We continue to forecast lower average headline inflation of 1.8% in 2025, indicating a sharp decline from 2.3% in 2024. However, the higher-than-expected October outturn provides some upside risk to our forecast. For 2026, we expect inflation to average higher at 2.6%, reflecting the fading base effect from electricity discounts and a gradual demand recovery. The October inflation print will also feed into the 2026 minimum wage formula together with 3Q GDP growth data, with the official announcement likely on 21 November.

Policy implications. We maintain our forecast for the BI Rate to decline to a terminal level of 4.00% in 2026, implying one 25bp cut in 2025 with the remaining easing in 2026. The October inflation outturn suggests a lower real BI Rate of 1.9%, down from 2.1% in September (Exhibit 5), but still above the long-term average of 1.6%, indicating a still-restrictive monetary stance. Underlying inflation also remains low after excluding the gold effect, suggesting still-weak domestic demand. However, intensified Rupiah pressures could force BI to shift toward a more pro-stability stance.