Indonesia Faces Rising Inflation as Electricity Discounts End and Holiday Demand Surges

Indonesia’s consumer price index (CPI) surged to its highest level since December last year, driven by the expiration of government electricity discounts and heightened demand during the Idul Fitri holiday season. The headline inflation rate reached 1.03 percent year-on-year in March 2025, according to Statistics Indonesia (BPS), signaling a rebound after months of subdued price growth. As the country grapples with these economic pressures, questions linger about the broader implications for purchasing power and policy responses in the coming months.

Inflation Rebounds Amid Policy Shifts

The latest figures from BPS reveal a notable uptick in inflation, with the CPI rising from 106.13 in March 2024 to 107.22 in March 2025. This marks a significant shift after a decline of 0.09 percent in February—the first annual deflation in 25 years—and a modest increase of 0.76 percent in January, the lowest since January 2000. Speaking at a press conference, BPS production undersecretary M. Habibullah highlighted a monthly inflation spike of 1.65 percent in March, driven largely by the normalization of electricity prices following the end of a government discount program.

In December 2024, the Indonesian government introduced a 50 percent electricity discount for households using 1,300 volt-ampere (VA) power or below, effective for January and February 2025. The policy aimed to ease financial burdens on lower-income families but, upon its expiration, contributed significantly to the inflation surge. Categories such as housing, water, electricity, and household fuel accounted for 1.18 percentage points of the monthly headline figure, underscoring the impact of this policy reversal.

Despite the rise, the current inflation rate remains below Bank Indonesia’s target range of 1.5 to 3.5 percent for 2025. This gap raises questions about whether the central bank will adjust monetary policies to stimulate growth or maintain stability in the face of emerging inflationary pressures.

Seasonal and Structural Drivers of Price Increases

Beyond electricity costs, seasonal factors tied to Ramadan and Idul Fitri played a critical role in pushing prices upward. Annual inflation was predominantly fueled by the food, beverages, and tobacco category, contributing 0.61 percentage points. Staple commodities like chili and onions saw significant price hikes, reflecting heightened demand during the holiday period when families gather for celebrations and communal feasts.

Josua Pardede, chief economist at Bank Permata, noted in a recent analysis that the expiration of electricity tariff discounts compounded these seasonal effects. “With the expiration of the electricity discounts, CPI inflation is expected to remain within Bank Indonesia’s target range of 1.5 to 3.5 percent by the end of 2025” he stated, emphasizing the predictability of the current trajectory. However, he also pointed to a softening in core inflation—excluding volatile food prices and government-controlled rates—when the impact of rising gold prices is stripped out. At 2.48 percent year-on-year, core inflation suggests a decline in purchasing power even during the festive season, a concerning sign for consumer confidence.

Interestingly, the transportation sector defied typical holiday trends, recording a month-to-month decline of 0.08 percent. Discounted airfares and toll fees offset the usual inflationary pressures associated with Idul Fitri, a time when millions of Indonesians travel for homecoming events known as mudik. This anomaly highlights the complex interplay of policy interventions and market dynamics in shaping inflation patterns.

Currency Woes and Imported Inflation Risks

Adding to the economic challenges is the weakening of the Indonesian rupiah against the US dollar, a trend that has persisted since the start of 2025. The depreciation raises the cost of imported goods, which form a substantial portion of inputs for domestic manufacturers. Businesses and analysts have warned that this could intensify imported inflationary pressures, potentially leading to cost-push inflation—a scenario where producers pass higher costs onto consumers.

Josua Pardede cautioned that the rupiah’s decline could elevate “inflationary passthrough risks” as the cost of raw materials and intermediate goods rises. For a country heavily reliant on imports for industrial production, this poses a significant threat to price stability. If manufacturers absorb these costs temporarily, profit margins may shrink; if they pass them on, households could face further financial strain at a time when purchasing power is already under pressure.

The rupiah’s trajectory remains a focal point for policymakers. While Bank Indonesia has historically intervened to stabilize the currency through interest rate adjustments or foreign exchange reserves, sustained depreciation could complicate efforts to keep inflation within the target range. The central bank’s next moves will likely be scrutinized by markets and consumers alike, as they balance the need for economic growth with the risk of spiraling prices.

Broader Implications for Indonesian Households

For many Indonesians, the rising CPI translates to a tangible increase in the cost of living. The normalization of electricity prices hits low- and middle-income households hardest, as energy costs form a significant portion of monthly budgets. Coupled with higher food prices during Idul Fitri, the inflationary rebound could strain family finances, particularly in rural areas and urban informal sectors where income growth often lags behind price increases.

The decline in purchasing power, as noted in core inflation trends, suggests that even festive spending—a key driver of economic activity during Ramadan—may not be enough to offset broader economic challenges. Small vendors at traditional markets, like those in Jakarta, are feeling the pinch as consumers tighten their belts. A vendor captured in a recent photograph waiting for customers on her smartphone symbolizes the quiet struggle of many who rely on daily sales to make ends meet.

Moreover, the disparity between urban and rural inflation rates remains a concern. While urban centers like Jakarta may absorb price shocks through diversified income sources, rural communities dependent on agriculture face additional risks from volatile food prices. Onions and chili, staples in Indonesian cuisine, are often sourced locally, but supply chain disruptions or weather-related harvest issues can exacerbate price swings, disproportionately affecting those least equipped to cope.

Policy Responses and Future Outlook

As inflation creeps upward, the Indonesian government faces a delicate balancing act. Extending subsidies or reintroducing discounts on utilities could provide short-term relief but risks straining fiscal resources at a time when global economic uncertainties—such as fluctuating oil prices and geopolitical tensions—could impact budget planning. Conversely, allowing market forces to dictate price adjustments might align with long-term economic reforms but could alienate voters already frustrated by rising costs.

Bank Indonesia’s role will be pivotal in the months ahead. While the current inflation rate falls below the target range, the combination of currency depreciation and imported inflation risks may prompt a tightening of monetary policy. Raising interest rates could curb price growth but might also dampen investment and consumer spending, critical drivers of Indonesia’s post-pandemic recovery.

On the other hand, targeted interventions—such as price controls on essential goods or support for small-scale farmers—could mitigate the impact on vulnerable populations without broad fiscal overreach. Analysts suggest that enhancing domestic production of key commodities might reduce reliance on imports, thereby insulating the economy from external shocks like rupiah depreciation. However, such measures require time and investment, leaving policymakers with few immediate solutions.

Navigating Economic Uncertainty

Indonesia’s economic landscape in 2025 is shaping up to be a test of resilience for both policymakers and citizens. The interplay of domestic policy decisions, seasonal demand, and global economic trends underscores the complexity of managing inflation in a developing economy. While the current CPI increase remains within manageable bounds, the underlying factors—waning purchasing power, currency challenges, and structural dependencies—suggest that vigilance is warranted.

As the nation moves beyond the Idul Fitri festivities, the focus will likely shift to how effectively the government and Bank Indonesia can address these pressures. For now, millions of Indonesians, from market vendors to urban professionals, await clarity on whether the price surges are a temporary blip or the start of a more persistent economic burden.

With inflation dynamics still unfolding, one question looms large: can Indonesia strike the right balance between growth and stability in an increasingly uncertain global environment?