Solid domestic demand drove economic improvements in most regions in the first quarter of 2026. Household consumption increased across regions. This was supported by higher income from the mandatory religious holiday allowance (THR) disbursement, rising commodity prices, and government incentive programs and social spending. Investment also improved in most regions, driven by ongoing government and private projects in key sectors. In the Kalimantan and Balinusra regions, however, the improvement in domestic demand was insufficient to fully elevate overall economic performance in the first quarter of 2026. By sector, improving domestic demand, particularly household consumption, was reflected in stronger trade sector performance, especially domestic retail.
The momentum of economic improvement in various regions must be maintained throughout 2026 amid the ongoing war in the Middle East. Economic improvements primarily stem from resilient domestic demand, particularly household consumption. Strong household consumption is expected to support stronger economic growth in 2026 compared with 2025 in most regions, except Kalimantan, which faces pressure on external performance. Investment is also projected to improve, driven by government infrastructure projects, Danantara strategic projects and ongoing multiyear private investment in all regions. Nevertheless, the escalating conflict in the Middle East has intensified pressure on external performance in various regions. By sector, improving domestic demand is supporting the trade sector in most regions as well as accommodation and food service activities in the western regions, alongside domestically oriented manufacturing in Java. Meanwhile, export-oriented industries, particularly in Sulampua, achieved limited growth due to sluggish demand from trading partners affected indirectly by the war. Growth in accommodation and food service activities in the Balinusra region was also affected by the indirect impact of the war on disrupting the mobility of international travellers from the Middle East and Europe.
Composite Consumer Price Index (CPI) inflation in the first quarter of 2026 remained under control. Core inflation remained stable, reflecting contained demand pressures despite rising global commodity prices, particularly gold, contributed to higher core inflation across regions, especially Eastern Indonesia. Inflationary pressures from administered prices (AP) remained contained, primarily due to the low base effect of electricity tariff discounts in the previous year. Meanwhile, volatile food (VF) inflation was maintained below the 5% target, supported by adequate food supply. Nevertheless, inflation in several regions was recorded above 5%, notably in Sumatra and Sulampua, which continues to demand attention.
CPI inflation in 2026 is projected to remain within the 2.5±1% target range despite the prospect of rising global commodity prices due to the war. On-target inflation is supported by consistent monetary policy from Bank Indonesia to manage domestic demand, to anchor inflation expectations and to maintain external stability amid heightened global economic uncertainty due to the escalating conflict in the Middle East. Mild domestic demand pressures on core inflation are anticipated because economic capacity remains below potential. Volatile food inflation is projected to remain in line with the target below 5%. This is supported by strong synergy between Bank Indonesia and the (central and regional) Government through the National/Regional Inflation Control Teams (TPIP and TPID), including implementation of the National Food Security Program. Meanwhile, pressures from administered prices are also expected to remain under control due to government policy not to adjust energy prices.
Looking ahead, the impact of the war warrants continued close monitoring due to its potential impact on regional economies. The intensity and magnitude of disruptions caused by the war have increased financial market uncertainty, raised commodity prices and disrupted global supply chains. Such developments could weigh on the global economic outlook and affect economic prospects in various regions depending on the characteristics of their economic structure. Bank Indonesia will continue strengthening its policy mix through monetary, macroprudential and payment system policies and will work in synergy with government policies to maintain stability, while supporting economic growth.
