Indonesia Grapples with Record-Low Inflation Amid Economic Concerns

Indonesia has recorded its lowest inflation rate in over two decades, with the consumer price index (CPI) slipping to a mere 0.76 percent year-on-year (yoy) in January 2025. Announced by Interim Statistics Indonesia (BPS) head Amalia Adininggar Widyasanti, this figure marks a significant deviation from the government and Bank Indonesia’s target range of 1.5 to 3.5 percent, raising concerns among economists about the underlying health of South East Asia’s largest economy.

While on the surface, low inflation might appear to signal economic stability, experts warn that this multi-decade low could reflect deeper issues, including diminishing consumer spending power and sluggish domestic demand. The decline, driven primarily by a government-subsidised electricity discount, has sparked a broader debate about the sustainability of such populist measures and their long-term impact on Indonesia’s economic trajectory.

A Dramatic Drop in Inflation

The January 2025 inflation rate of 0.76 percent yoy is the lowest since January 2000, according to BPS data. This follows a consistent decline from 2.57 percent at the start of 2024 to 1.57 percent by December last year. On a month-to-month basis, inflation fell by 0.76 percent, largely attributed to a sharp drop in electricity prices.

The government introduced a 50 percent electricity discount for households using 1,300 volt-ampere (VA) power or below, effective for January and February 2025. This measure was initially designed to offset a planned value-added tax (VAT) hike from 11 to 12 percent. However, President Prabowo Subianto reversed the VAT increase at the last moment, limiting it to luxury goods and services, while retaining the electricity subsidy. The Finance Ministry’s Fiscal Policy Agency (BKF) head, Febrio Kacaribu, defended the discount, stating it was intended “to maintain people’s spending power and push economic activity.”

The impact of this policy is evident in the price index for housing, water, electricity, and household fuels, which saw a dramatic decline of 8.75 percent yoy, with electricity being the dominant factor. Government-controlled prices as a whole dropped by 6.4 percent yoy. However, core inflation, which excludes volatile food prices and government-controlled rates, rose to 2.36 percent yoy, suggesting that underlying demand pressures persist despite the headline figure.

While the electricity discount has provided temporary relief for millions of Indonesian households, it has also contributed to an unusual deflationary trend for January, a month typically associated with seasonal price increases. Josua Pardede, chief economist at Bank Permata, noted that monthly deflation at this time of year is “uncommon,” as seasonal trends usually push volatile prices upward. Indeed, volatile food inflation surged to 3.07 percent yoy in January, up from near zero in December 2024, highlighting the uneven impact of economic pressures across sectors.

Economists from Bank of America, Kai Wei Ang and Rahul Bajoria, estimated that without the electricity discount, headline inflation would have been closer to 2.2 percent in January. They predict a rebound to around 2.7 percent by the end of 2025, with inflation likely to remain stagnant at 0.7 percent in February while the discount is still in effect. Their revised forecast for average headline inflation in 2025 is now 2.1 percent, down from an earlier estimate of 2.3 percent.

However, not all analyses are optimistic. Bhima Yudhistira, executive director of the Center of Economics and Law Studies (CELIOS), argued that the record-low inflation reflects a troubling decline in consumer spending power. “The logic is, when electricity gets discounted, people spend the money on something else,” he told The Jakarta Post. Yet, this expected shift in consumption has not materialised. Instead, households appear to be saving the extra funds, possibly in preparation for major cultural events like Ramadan and Idul Fitri in March.

This trend of saving rather than spending is particularly concerning given that domestic consumption accounts for over 50 percent of Indonesia’s gross domestic product (GDP) growth. With GDP growth already showing signs of slowing—full details for the fourth quarter of 2024 are set to be released on 5 February—analysts fear that persistent low inflation could signal a deeper structural issue in the economy.

President Prabowo Subianto’s administration, which took office in late 2024, has leaned heavily on populist economic measures to bolster public support. The electricity discount is just one of several initiatives, alongside broader stimulus packages and welfare programmes, aimed at cushioning the impact of global economic headwinds on ordinary Indonesians. However, the last-minute reversal of the VAT hike has raised questions about policy consistency and long-term fiscal planning.

Critics argue that while such measures provide short-term relief, they risk distorting market signals and delaying necessary structural reforms. Bhima Yudhistira, for instance, urged the government to focus on job creation, controlling imports that undermine domestic industries, and rolling out broader incentives to stimulate consumption. Without addressing these root causes, temporary subsidies like the electricity discount may simply mask underlying economic weaknesses.

Moreover, the reliance on government-controlled price reductions to manage inflation could create fiscal challenges down the line. The BKF has emphasised that core inflation remains stable, suggesting that demand is still growing. Yet, if consumer confidence does not recover, the government may face pressure to introduce further subsidies or stimulus measures, potentially straining public finances at a time when global economic uncertainty looms large.

Broader Economic Context

Indonesia’s economic performance in recent years has been a mixed bag. While the country has maintained relatively steady growth compared to some of its regional peers, challenges such as income inequality, underemployment, and reliance on commodity exports continue to hinder sustainable development. Domestic consumption, long a key driver of GDP growth, has shown signs of weakening, exacerbated by inflationary pressures in 2023 and early 2024 that eroded purchasing power.

The government’s decision to slash ministerial and regional spending to finance welfare programmes, as reported recently, reflects a broader shift toward prioritising social support over infrastructure or institutional investment. While this approach may resonate with voters, it risks neglecting the long-term investments needed to boost productivity and competitiveness.

Adding to the complexity is the global economic environment. With major economies like the United States and China facing their own challenges—ranging from interest rate hikes to supply chain disruptions—Indonesia must navigate a delicate balance between domestic priorities and external pressures. A potential rebound in inflation later in 2025, as predicted by Bank of America economists, could further complicate monetary policy decisions for Bank Indonesia, which has already struggled to meet its inflation targets in recent years.

The record-low inflation rate in January 2025 is a double-edged sword for Indonesia. On one hand, it offers temporary relief for households grappling with rising costs in other areas, such as food. On the other, it underscores a worrying decline in consumer spending, a critical engine of economic growth. If savings continue to outpace consumption, as suggested by Bhima Yudhistira’s analysis, the government may need to rethink its approach to economic stimulus.

For now, all eyes are on the upcoming GDP growth figures for the fourth quarter of 2024, which will provide a clearer picture of the economy’s trajectory heading into the new year. Economists like Josua Pardede project an inflation rate of 2.33 percent by the end of 2025, assuming no major policy shifts or external shocks. However, with the electricity discount set to expire in March, a sudden uptick in inflation could catch policymakers off guard if consumer confidence remains subdued.

President Prabowo Subianto’s administration faces a critical test in balancing short-term populist measures with the long-term reforms needed to address structural challenges. While the electricity discount has provided a temporary buffer, it is not a substitute for comprehensive policies aimed at job creation, industrial support, and sustainable growth. If unaddressed, the current deflationary trend could signal not just an economic anomaly, but the beginning of a more protracted slowdown.

As Indonesia prepares for cultural and religious observances like Ramadan and Idul Fitri, which traditionally boost consumption, the government will be hoping for a natural uptick in spending. Yet, without targeted interventions to restore consumer confidence and stimulate demand, the world’s fourth-most populous nation may find itself grappling with economic stagnation at a time when resilience is needed most.