INTERNATIONAL – In February 2025, Indonesia experienced an annual deflation of 0.09%, marking its first deflationary period since March 2000. This unexpected decline contrasts sharply with market forecasts, which had anticipated a 0.60% inflation rate for the month.
A significant factor contributing to this deflation was the Indonesian government’s implementation of a substantial 50% discount on electricity tariffs for specific customer categories during January and February. This policy aimed to stimulate economic growth by reducing utility costs for consumers. The reduction in electricity prices led to a 12% year-on-year decrease in the housing, water, electricity, and household fuel expenditure group, making it one of the primary contributors to the overall deflation rate.
In addition to lower electricity costs, prices of staple foods such as rice, tomatoes, and red chilies declined. This decrease is attributed to a recovery in food production following a drought in the previous year, which had previously constrained supply and elevated prices.
Despite the overall deflation, core inflation—which excludes volatile items like food and energy—experienced a slight uptick, reaching 2.48% in February compared to 2.36% in January. This increase suggests that underlying consumer demand remains stable, indicating that the deflation was primarily driven by temporary factors rather than a broad-based decline in prices.
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Looking ahead, economists anticipate that the consumer price index (CPI) will rise starting in March as the temporary electricity discounts conclude. However, the government plans to introduce additional stimulus measures, including discounts on airfares and toll roads during the Ramadan holiday period. These initiatives are expected to keep inflation rates relatively low, supporting the government’s GDP growth target of 5.2% for the year.
The current low inflation environment may influence monetary policy decisions by Bank Indonesia, the nation’s central bank. With inflation below the target range of 1.5% to 3.5% for two consecutive months, there is potential for the central bank to consider rate cuts to further stimulate economic activity. However, any decisions will also take into account global market conditions and other external factors.
In summary, Indonesia’s recent deflationary episode is largely attributed to government interventions aimed at reducing living costs and boosting economic growth. While these measures have temporarily suppressed inflation, underlying economic indicators suggest that consumer demand remains robust. As temporary discounts phase out and new stimulus measures are introduced, inflation rates are expected to stabilize, aligning with the government’s economic objectives for the year.
