Indonesia’s Early 2025 Deflation Driven by Power Subsidies, Not Weak Demand: LPS Chairman

JAKARTA, Investortrust.id – Indonesia has recorded two consecutive months of deflation at the beginning of 2025, prompting concerns among economists about waning consumer demand. However, the Chairman of Indonesia's Deposit Insurance Corporation, Purbaya Yudhi Sadewa, believes the decline in the Consumer Price Index reflects temporary government policy rather than a structural weakening of purchasing power.

Speaking during the Konvergensi podcast with Investortrust CEO Primus Dorimulu on Thursday, March 27, Purbaya explained that the deflation recorded in January and February stemmed primarily from a government incentive—a 50% discount on electricity tariffs for low-income households over the two-month period.

In full, the Deposit Insurance Corporation, known locally as Lembaga Penjamin Simpanan or LPS, maintains that without factoring in this temporary discount, core inflation would have remained within the normal range of 2.3%.

“Inflation was negative in both January and February. Some economists interpreted this as a sign of weakening demand. But I investigated further, and it turns out the main driver was the government-controlled electricity prices, which received a 50% discount for two months,” said Purbaya.

Indonesia’s statistics agency, the Central Statistics Agency (BPS), reported a deflation of 0.48% month-on-month in February 2025. This follows a 0.76% deflation in January. According to BPS Chief Amalia Adininggar Widyasanti, the key contributors to February’s deflation included the electricity discount, chicken meat, red chili, tomatoes, and eggs. Electricity alone contributed 0.67% to the month’s deflation.

While Purbaya did not criticize BPS for including the electricity discount in its calculations, he expressed concern that such technicalities could lead to misinterpretations.

“I’m not blaming BPS, but including the discount in the headline inflation figure has created a negative perception among some economists,” he noted.

Purbaya emphasized that a zero percent inflation rate is not an ideal indicator for a healthy economy. In his view, the optimal range for inflation is between 2% and 3%—high enough to indicate economic activity, yet low enough to maintain stability.

“Zero percent inflation is bad. Inflation above 15% is also bad. The sweet spot is between 2% and 3%,” he added.

While he acknowledged that Indonesia’s economy had shown signs of slowdown until December 2024, with declining sales of vehicles and cement and a stagnant Purchasing Managers’ Index (PMI), he said there had been a marked turnaround since the start of 2025.

“Yes, economic conditions deteriorated through the end of last year. Car sales, cement sales, all were down. PMI was flat. But recent data from January and February shows a significant reversal,” he said.

Purbaya pointed to the latest manufacturing PMI reading of 53.6 as a sign of growing business optimism in Indonesia’s industrial sector.

“A PMI of 53.6 indicates that manufacturers expect substantial growth in their spending going forward. This reflects confidence in strong demand,” he said.

In parallel, consumer confidence has also strengthened. In February 2025, Indonesia’s Consumer Confidence Index (CCI) rose above 100, reaching 105—its highest level in months. This suggests a more optimistic outlook among households.

“The CCI in February surged past 100 after being stuck below that level for months, indicating that our people are finally feeling more optimistic about their economic prospects,” Purbaya concluded.