Inflation Fell to 2.88%. Why Haven’t Business Costs Followed?

Indonesia’s July inflation figures offered a welcome change in direction. Annual consumer inflation eased to 2.88%, down from 3.34% in June. The Consumer Price Index also declined by 0.14% from the previous month.

For a June. The Consumer Price Index also declined by company still paying interest, buying materials, chasing overdue invoices, and renegotiating supplier contracts, however, business may not feel noticeably cheaper.

Bank Indonesia is maintaining its policy rate at 5.75%. The average banking-sector lending rate was 8.81% in June. Retailers surveyed by the central bank also expected price pressure to increase in August, primarily because of higher raw-material costs.

This is where the distinction between macroeconomic relief and company-level relief becomes critical. Lower inflation does not mean that prices have returned to earlier levels. It does not guarantee that financing will become cheaper quickly, or that margins will automatically recover.

Lower inflation does not mean lower prices everywhere

An annual inflation rate of 2.88% means that Indonesia’s overall consumer-price level was still higher than it had been in July 2025. Prices were simply rising at a slower rate.

This is disinflation—not a broad reversal of previous price increases.

The 0.14% monthly deflation indicates that the aggregate price index declined from June. Yet averages conceal considerable variation. Certain food prices may fall while rent, wages, imported materials, utilities, and distribution costs remain elevated.

Core inflation stood at 2.76% in July, unchanged from June, according to data reported by Reuters. Core inflation removes volatile food and government-administered prices to provide a view of more persistent underlying price pressure.

For an individual business, even that measure may be too broad. Profitability depends on the company’s own combination of financing’s own combination of financing, labour, materials, energy, logistics, foreign exchange exposure, and pricing power.

A restaurant may benefit from falling prices for one ingredient while paying more for another. A manufacturer may face weak demand for a finished product but higher costs for imported inputs. A creative studio may hold little inventory, yet still finance payroll while clients delay milestone payments.

No single inflation number captures all those realities.

Why has the BI-Rate not fallen?

Bank Indonesia maintained the BI-Rate at 5.75% at its 21–22 July meeting. Its decision was not based on domestic consumer inflation alone. The central bank also cited currency stability, foreign capital flows, global financial conditions, and external uncertainty.

A single month of softer inflation therefore does not automatically produce a policy-rate cut.

July inflation was comfortably within Bank Indonesia’s 1.5%–3.5% target range. Nevertheless, risks to prices and the rupiah have not disappeared. Economists cited by Reuters continued to flag weather-related risks to food production and the potential impact of energy-market developments.

Businesses consequently face a timing gap. The inflation indicator has improved, but borrowing costs have not necessarily followed.

Bank Indonesia reported an average lending rate of 8.81% in June, compared with a one-month deposit rate of 4.76%. These are system-wide averages. The rate offered to an individual borrower will vary according to the lender, loan purpose, collateral, maturity, industry, and credit profile.

Companies should therefore avoid building expansion plans around the assumption that funding will become substantially cheaper within the next few months. Rates may eventually decline, but the July data cannot establish when or by how much.

Credit may be available without being economical to use

The banking data reveal another apparent contradiction.

Overall credit grew by 12.67% year on year in June. Investment lending expanded by 24.90%, while working-capital lending grew more moderately at 8.94%.

Undisbursed credit facilities reached Rp2,490 trillion, equivalent to 21.52% of available credit lines. That does not mean the money is idle without purpose. Some facilities may be held for seasonal requirements, phased investments, liquidity reserves, or projects subject to further drawdown conditions.

The figure does show, however, that having access to credit is not the same as being ready to use it.

When interest rates are relatively high, drawing a facility too early creates expenses before equipment, inventory, or new locations generate revenue. Waiting too long, on the other hand, may prevent a company from responding when demand genuinely strengthens.

The decision must be based on project cash flow rather than the size of an approved facility.

Before borrowing for machinery, inventory, or expansion, management should model when expenditure begins, when sales are likely to occur, and when customer payments will actually arrive. A project that looks profitable on an income statement can still create a liquidity crisis when the payment gap is too long.

Raw-material expectations remain a warning

Bank Indonesia’s Retail Sales Survey indicated that June sales were expected to contract by 0.8% from the previous month, an improvement from the deeper decline recorded earlier.

At the same time, the Price Expectations Index for August rose to 178.0 from 175.8 in July. Respondents attributed the increase mainly to higher raw-material prices.

The index is not a formal forecast that inflation will inevitably rise again. It does indicate that retailers do not yet see cost pressure disappearing.

This can create a difficult commercial environment. Customer demand may not be strong enough to absorb a full price increase, while suppliers begin submitting higher quotations.

A business that immediately passes through every cost increase may lose customers. One that keeps prices unchanged for too long may sacrifice margins and working capital.

A more resilient response is to redesign the pricing architecture. A price-sensitive core product can remain accessible while costs are recovered through product sizes, minimum orders, delivery charges, service tiers, or optional features.

The purpose is not to disguise higher prices. It is to preserve customer choice without continuing to sell below a sustainable cost.

Three scenarios businesses should prepare for

No single projection can reliably determine the direction of interest rates, exchange rates, and input costs throughout the second half of the year. Management teams need more than one plan.

Scenario one: inflation remains controlled and costs gradually ease

Under this scenario, inflation stays within the target range, material pressure moderates, the rupiah stabilises, and lending rates eventually adjust.

Companies could begin assessing refinancing options, negotiating longer supplier agreements, and restarting productivity investments that had been postponed.

Expansion should still be tied to verified demand. Cheaper money does not turn a weak project into a strong one.

Scenario two: inflation stays low, but interest rates remain high

Domestic prices may remain controlled while external and currency risks keep monetary policy restrictive.

Revenue could grow moderately while financing expenses stay heavy. Companies should prioritise projects with shorter payback periods and postpone spending that increases scale without improving productivity.

The focus shifts from accumulating assets to increasing the efficiency of working capital.

Scenario three: cost pressure returns

Food, energy, imported inputs, or logistics expenses could begin rising again. A company that assumes the inflation problem has ended may enter this scenario without sufficient margin protection.

The answer is not indiscriminate stockpiling. A more proportionate approach is to identify critical materials, diversify suppliers, define appropriate safety-stock levels, and establish price-adjustment mechanisms in longer-term contracts.

Large businesses and MSMEs have different room to manoeuvre

Larger companies typically have broader access to credit, hedging instruments, procurement contracts, and treasury analysis. Yet their scale also means a relatively small change in interest rates can create a significant absolute expense.

They should map debt by fixed or floating rate, maturity, currency, covenant, and intended use. Risk cannot be managed only at the level of total borrowing because every facility responds differently to financial conditions.

For many MSMEs, the pressure is more immediate. One additional repayment can absorb the profit from several products. When customers pay late, an owner may have to use personal funds to cover wages or restock essential inventory.

The first priority is therefore basic financial discipline.

Build a rolling cash-flow forecast covering at least 13 weeks. Separate household and business accounts. Monitor overdue receivables. Calculate margins after delivery, platform fees, discounts, returns, and interest—not merely the difference between selling price and material cost.

Rapidly expanding digital payments can also create useful business records. Bank Indonesia reported that QRIS transaction volume grew by 100.12% year on year in the second quarter of 2026. Well-organised digital transaction data can help owners understand purchasing patterns and, in some financing models, improve the documentation available to lenders.

Digitalisation does not make an unviable company creditworthy. It can, however, make an otherwise opaque business easier to assess.

Cutting protection can create a larger future cost

When margins are under pressure, expenses with no immediate visible return are often targeted first. Maintenance, data security, training, and insurance may be treated as non-urgent.

That can produce short-term savings while increasing the severity of a future disruption.

Risk protection should not be maintained without review. Businesses should assess whether insured values, coverage, deductibles, and exclusions remain appropriate.

Assets that are no longer used can be removed. Duplicated cover can be consolidated. Yet risks capable of stopping operations—fire, failure of critical equipment, employee accidents, cyber incidents, third-party liability, or prolonged revenue interruption—should not be ignored simply to ease temporary cash pressure.

Good cost reduction eliminates waste. Poor cost reduction transfers a visible expense today into a potentially much larger loss tomorrow.

What the data cannot tell us

The July figures do not prove that purchasing power has improved across every income group. Lower inflation does not ensure that companies will sell more units.

The available data also cannot confirm that Bank Indonesia will cut rates at its next meeting, that commercial banks will rapidly reprice their loans, or that raw-material prices will remain stable through the end of the year.

The World Bank has described Indonesia’s economy as resilient while emphasising the need for higher productivity, better-quality jobs, more efficient logistics, and structural reforms to sustain medium-term growth.

That resilience does not depend on macroeconomic policy alone. It also depends on whether companies can convert capital, people, and technology into more valuable output.

An opportunity to improve the quality of growth

Lower inflation is still good news. More stable prices improve planning, reduce uncertainty, and allow consumers and companies to make decisions with greater confidence.

Businesses should not, however, wait for lower interest rates before strengthening their finances.

Shorten collection times. Reduce slow-moving inventory. Review debt maturities. Improve pricing structures. Digitise transaction records. Identify critical suppliers. Ensure that risk protection reflects changes in asset values and operational dependencies.

An inflation rate of 2.88% does not mean that every pressure has ended. It creates an opportunity to strengthen the business before the next set of conditions arrives.

The most prepared company is not necessarily the one that predicts interest rates correctly. It is often the one that preserves enough room to keep making decisions when its prediction proves wrong.