Economics
Economics: Indonesia Inflation Eases On Softer Gold Prices, But More Pressure Looms
Analyst
Highlights
- Headline inflation eased slightly to 3.23% yoy in Oct 26 (from 3.28%), in line with expectations, as lower core inflation (2.56%, down from 2.84%) on weak domestic demand and softer gold prices offset a sharp rise in volatile food inflation (5.81%, up from 5.03%) driven by El Niño-related supply constraints.
- Markets shrugged off the modest CPI print, with the rupiah weakening to Rp18,158/USD and 10-year bond yields rising to 7.73%, reflecting worsening risk perception amid high oil prices and uncertainty ahead of the US midterm elections.
- Inflationary pressures are expected to build, breaching the 3.5% target by end-26 and into 2Q27 on intensifying El Niño effects and rupiah-driven imported inflation. This is likely to force Bank Indonesia to raise its policy rate by 25-50bp to 6.00-6.25% by the end of 2026, compounded by a potentially hawkish Fed hike in Dec 26.
Analysis
- Headline inflation edged down to 3.23% yoy in Oct 26 from 3.28% the previous month, broadly in line with the market consensus of 3.30%. The marginal decline was driven by lower core inflation, reflecting weak domestic demand and softer gold prices.
- Core inflation fell from 2.84% to 2.56%, weighed by declining global gold prices and subdued domestic demand. Administered-price inflation also eased slightly, from 3.25% to 3.24% yoy, on the back of lower airfare. By contrast, volatile food inflation rose sharply from 5.03% to 5.81%, driven by higher prices for red chillies, rice, chicken meat, tomatoes and beef amid lower agricultural output caused by a worsening El Niño.
- On a monthly basis, inflation slowed to 0.22% mom from 0.30% in Sep 26, as food-price inflation moderated. Monthly core inflation was steady, while administered-price inflation picked up on higher airfares.
- Despite the relatively modest CPI print, a robust trade surplus and expansive PMI readings, financial markets reacted only lukewarmly. The rupiah continued to weaken, reaching Rp 18,158 per US dollar, while 10-year government bond yields rose to 7.73%. This partly reflects market concerns over a repricing of Indonesian assets as risk perception deteriorates amid a looming MSCI downgrade, high oil prices and anticipation of the US midterm elections on 3 November.
Highlights
- Headline inflation eased slightly to 3.23% yoy in Oct 26 (from 3.28%), in line with expectations, as lower core inflation (2.56%, down from 2.84%) on weak domestic demand and softer gold prices offset a sharp rise in volatile food inflation (5.81%, up from 5.03%) driven by El Niño-related supply constraints.
- Markets shrugged off the modest CPI print, with the rupiah weakening to Rp18,158/USD and 10-year bond yields rising to 7.73%, reflecting worsening risk perception amid high oil prices and uncertainty ahead of the US midterm elections.
- Inflationary pressures are expected to build, breaching the 3.5% target by end-26 and into 2Q27 on intensifying El Niño effects and rupiah-driven imported inflation. This is likely to force Bank Indonesia to raise its policy rate by 25-50bp to 6.00-6.25% by the end of 2026, compounded by a potentially hawkish Fed hike in Dec 26.
Analysis
- Headline inflation edged down to 3.23% yoy in Oct 26 from 3.28% the previous month, broadly in line with the market consensus of 3.30%. The marginal decline was driven by lower core inflation, reflecting weak domestic demand and softer gold prices.
- Core inflation fell from 2.84% to 2.56%, weighed by declining global gold prices and subdued domestic demand. Administered-price inflation also eased slightly, from 3.25% to 3.24% yoy, on the back of lower airfare. By contrast, volatile food inflation rose sharply from 5.03% to 5.81%, driven by higher prices for red chillies, rice, chicken meat, tomatoes and beef amid lower agricultural output caused by a worsening El Niño.
- On a monthly basis, inflation slowed to 0.22% mom from 0.30% in Sep 26, as food-price inflation moderated. Monthly core inflation was steady, while administered-price inflation picked up on higher airfares.
- Despite the relatively modest CPI print, a robust trade surplus and expansive PMI readings, financial markets reacted only lukewarmly. The rupiah continued to weaken, reaching Rp 18,158 per US dollar, while 10-year government bond yields rose to 7.73%. This partly reflects market concerns over a repricing of Indonesian assets as risk perception deteriorates amid a looming MSCI downgrade, high oil prices and anticipation of the US midterm elections on 3 November.
Analyst
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