Inflation
Learn what inflation is, how Indonesia measures it and how your small business can manage rising costs.
February 2024 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Inflation is the general rise in prices over time, so each rupiah buys a little less
- Statistics Indonesia (BPS) tracks price changes using the consumer price index (CPI), and the government targets 2.5% ±1% for 2025–2027
- You can work out the rate of price change for any item with the formula (new price − old price) ÷ old price × 100
- Small businesses can stay ahead of rising prices by cutting costs, watching margins, pricing carefully and keeping cash flow healthy
What is inflation?
Inflation is the general rise in the prices of goods and services over time. As prices climb, each rupiah buys less, so your purchasing power falls.
Picture a Rp50,000 budget that covers a week of coffee beans for your café this year. If supplier prices go up 10%, you'd need Rp55,000 next year to buy the same amount.
Inflation describes price rises that spread widely across the economy, beyond a jump in one or two items such as chillies. The opposite, a general fall in prices, is called deflation.
What causes inflation?
Prices start rising when spending grows faster than supply, or when the cost of producing goods goes up. People's expectations about future prices can add to the pressure.
These are the main drivers behind rising prices in Indonesia:
- Strong demand pulls prices up when shoppers want more than businesses can supply, known as demand-pull inflation
- Higher production costs push prices up, for example after a supply shock or a rise in government-set fuel prices
- A weaker rupiah makes imported goods and materials pricier, which feeds through to local prices
- Expectations of higher prices lead workers to seek bigger pay rises and businesses to raise prices early
For a small bakery, a weaker rupiah can lift the cost of imported wheat flour even when local demand stays flat. That's cost-push pressure reaching your supplier invoices.
How inflation is measured in Indonesia
Indonesia measures inflation mainly through the consumer price index (CPI), which tracks what households pay for a basket of everyday goods and services. According to Bank Indonesia, Statistics Indonesia (BPS) calculates CPI inflation across 11 spending categories. These include food, beverages and tobacco, as well as transportation, health and education.
BPS also splits the CPI figure into separate parts, which shows why prices move unevenly. Core inflation reflects lasting pressure from fundamentals such as supply and demand, the exchange rate, commodity prices and expectations.
Volatile food covers fresh food items whose prices swing with harvests and natural disruptions. Administered prices follow government policy on items like subsidised fuel, electricity and transport fares.
Core inflation reached 2.92% in August 2026, its highest level since March 2023, according to Trading Economics. The producer price index (PPI) tracks an earlier stage, measuring the prices producers and wholesalers receive. A rising PPI can signal cost increases heading for your supplier invoices.
What is the inflation rate?
The inflation rate is the percentage change in prices over a set period, often compared with the same month a year earlier. It's reported as one headline figure, though energy prices might rise faster than food prices in the same month.
Indonesia's annual inflation rate was 3.19% in August 2026, up from 2.88% in July, based on Trading Economics' summary of BPS data. Prices rose 0.21% during August alone.
That reading sits within the government's target of 2.5% ±1% for 2025–2027. The government set this target under Minister of Finance Regulation (PMK) No. 31 of 2024, Bank Indonesia explains. The target gives you a useful benchmark when you plan price changes for the year ahead.
How to calculate the inflation rate
You can work out the rate for anything you buy or sell with one formula: (new price − old price) ÷ old price × 100. Follow these steps:
- Note the old price at the start of the period
- Note the new price at the end of the period
- Subtract the old price from the new price to find the change
- Divide the change by the old price
- Multiply the result by 100 to get a percentage
Say a box of takeaway containers you buy went up from Rp10,000 to Rp10,500 over a year. The change is Rp500, and Rp500 ÷ Rp10,000 × 100 = 5%. That item rose faster than the national rate, so it's worth reviewing that supplier.
When inflation becomes a problem
Inflation becomes a problem when prices rise quickly or unpredictably. Low, steady price growth is easier to plan around, and a modest target leaves room for wages and prices to adjust.
Bank Indonesia notes that high inflation eats into real income, so your customers can afford less. Unpredictable price swings add uncertainty, making it harder for households and businesses to decide on spending and investment.
At the extreme end is hyperinflation, where prices climb extremely fast and money loses value quickly. Central banks usually respond to faster price growth by raising interest rates, which directly affects small businesses.
Why inflation matters to small businesses
Rising prices affect both your costs and your customers' spending, so they shape your business profitability. They can bring some benefits: the value of assets like property or inventory tends to rise, and your debts shrink in real terms.
More often, they bring challenges you'll want to plan for:
- Passing rising costs on to customers can be hard without losing sales
- Selling nonessential goods gets tougher as customers put essentials first
- Borrowing costs more because central banks often raise interest rates to slow price growth
- Planning gets harder when prices shift unpredictably from month to month
Indonesia's recent rate moves show how this works. Bank Indonesia raised the BI-Rate, its benchmark interest rate, by a cumulative 100 basis points in May–June 2026, Suara.com reported. It then held the rate at 5.75% at its 22–23 September 2026 meeting, according to Suara.com.
Understanding these pressures early helps you protect your business before higher costs reach your bottom line.
How small businesses can deal with inflation
You can soften the impact of rising prices with a few practical moves. Start with these:
- Cut expenses by switching to lower-cost suppliers, renegotiating leases or trimming optional spending
- Monitor your margins so you spot early when profitability slips, then adjust your prices
- Raise prices gradually, and offer loyal customers flexible payment terms to make the change easier to accept
- Manage cash flow closely, keeping enough cash on hand so you rely less on costly credit
- Compare loan terms from several lenders if you do need to borrow
Keep rising costs in check with Xero
Rising costs are easier to manage when you know exactly where your money is going. Xero brings your accounting data together in easy-to-read reports, so you can spot cost increases early and adjust prices with confidence.
Real-time cash flow visibility and forecasts help you plan ahead for higher costs and interest rates. Try Xero today and get one month free.
FAQs on inflation
Here are quick answers to other common questions about inflation.
Who benefits from inflation?
Borrowers with fixed-rate loans tend to gain most, because they repay with money that's worth less than when they borrowed it. Businesses with strong pricing power can also benefit when they raise prices faster than their own costs rise.
What is stagflation?
Stagflation is high inflation combined with weak economic growth and high unemployment. It's hard to fix, because raising interest rates to slow prices can also slow growth further.
How does inflation affect your savings?
Your savings lose purchasing power whenever the interest you earn is lower than the inflation rate. For example, a deposit earning 2% a year loses real value when prices rise 3%.
Is deflation better than inflation?
Persistent deflation brings its own problems, because customers often delay purchases while they wait for lower prices. It can also squeeze business revenue and make debts heavier in real terms.
Does inflation affect wages?
Wages often climb when prices rise, though they can lag behind prices, so workers' real income falls for a while. As an employer, you may face requests for pay rises that keep up with the cost of living.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.