Higher inflation in July. The headline inflation picked up to 2.4% y-o-y in July from 1.9% in June, matching our estimate but slightly above consensus’ 2.3% due to higher food prices (Exhibit 1). On a monthly basis, prices increased by 0.3% m-o-m, up from 0.2% in June. By contrast, core inflation edged down to 2.3% y-o-y in July from 2.4% in June, against expectations of it remaining unchanged.

Food inflation rose sharply. F&B and tobacco inflation rose sharply to 3.8% y-o-y from 2% in June, with monthly inflation of 1% m-o-m, up from 0.5% in June (Exhibit 2). As expected, Rice and red onion reported inflation of 1.6% and 10% m-o-m, respectively up from 1.1% and 5.7% in June. By contrast, garlic and cooking oil prices dropped slightly providing some offset (Exhibit 3). As expected, transport reported monthly inflation of 0.2% m-o-m, up from 0.1, implying 0.1% y-o-y, unchanged from June, reflecting higher non-subsidized fuel prices (Exhibit 4).

Lower core inflation. Core inflation stood at 0.1% m-o-m, unchanged from June, implying 2.3% y-o-y, down from 2.4%. The decline in core inflation was broad-based led by personal care and other services which fell to 9% y-o-y from 9.3%. Household equipment and F&B provision eased to 0.5% and 1.9% y-o-y, respectively, from 0.6% and 2% in June. By contrast, education inflation rose 2% y-o-y from 1.8%, reflecting new academic fees.

We maintain the lower inflation forecast for 2025. We maintain our average headline inflation forecast at 1.8% for 2025 which reflects a sharp drop from 2.3% in 2024. In terms of trajectory, we expect inflation to continue rising until September, approaching 3%, mainly reflecting the low base effect from the sharp drop in food prices last year as the El Nino effect faded. This implies an average of 2.5% in 2H, up from 1.2% in 1H, partly due to base effects from lower food prices.

Policy implications. We maintain our 2025 BI Rate forecast at 5.00%, implying another 25bps in rate cuts from the current 5.25%. The July inflation outturn suggests a lower BI Rate of 2.9% from 3.6% in Jun (Exhibit 5), but still well above the long-term average of 1.6%, suggesting still-restrictive monetary stance. In terms of timing, with a weaker Rupiah due to a stronger dollar following the Fed s hawkish stance in July, we believe BI will maintain its cautious approach, increasing the likelihood of a pause at the August meeting. However, we continue to believe that growth remains the dominant consideration in BI s policy framework, as it is still assessed to be below potential, consistent with benign core inflation.