Higher inflation in June. Headline inflation increased to 3.3% y-o-y from 3.1% in May, below our forecast but above market expectations (Mansek: 3.4%; Consensus: 3.2%). The pickup was mainly driven by transport and core inflation (Exhibit 1). On a monthly basis, CPI rose 0.4% m-o-m, up from 0.3% in May. Core inflation also edged higher to 2.8% y-o-y in June from 2.6% in May, above our forecast.

Transport inflation accelerated. Transport inflation rose to 4.6% y-o-y from 2.3% in May, with monthly inflation accelerating to 2.3% m-o-m from 0.6% in May, mainly reflecting the non-subsidized fuel price hike, led by a 32% increase in Pertamax price on 10 June (Exhibit 2). As such, fuel inflation increased by 4.5% m-o-m from 0.5% in May, contributing 0.2 percentage points (pp) to headline inflation vs. 0.02pp in May. Airfare prices also increased 6.1% m-o-m from 2.8% in May, contributing 0.05pp to headline CPI, up from 0.02pp in May.

Higher core inflation. Core inflation increased to 2.8% y-o-y from 2.6% in May, despite a stable monthly print of 0.2% m-o-m. The increase was led by household equipment, ICT, and healthcare inflation. Excluding gold prices, core inflation rose to 2.2% y-o-y from 2.0% in May, reflecting a weaker currency and pass-through from higher producer price inflation (Exhibit 3). Food inflation moderated to 4.7% y-o-y from 4.9% in May, led by chicken meat and chicken egg, while red onion and rice increased, providing some offset (Exhibit 4).

We still expect higher inflation in 2026. We now forecast headline inflation to average 3.4% y-o-y in 2026 vs. 3.2% previously and 1.9% in 2025, reflecting the low base effect from the electricity tariff discount, oil shock spillover, and higher food inflation due to El Ni o, which kicked in starting May. We forecast food inflation to pick up in 2H to an average of 6.8% y-o-y from 3.7% in 1H. We expect core inflation to average 2.3% y-o-y in 2026 from 2.4% in 2025, reflecting weaker gold prices.

Policy implication. We now expect the BI Rate to reach 6.00% this year, implying one additional 25bp hike. While we continue to view the current tightening cycle as a tactical response to FX pressures, we now expect the restrictive stance to remain in place for longer as Rupiah pressures persist. We assume the DXY averages 103 in 2H versus 97 in 1H on a more hawkish Fed. Nevertheless, the real policy rate would remain restrictive at 2.5%, above its long-term average of 1.6%, leaving room for future easing once FX pressures subside (Exhibit 5).