Indonesia experienced deflation for five consecutive months, from May to September 2024. Statistics Indonesia reported that the Consumer Price Index (CPI) in September 2024 fell, registering a monthly deflation of 0.12%. This deflation is deeper than the 0.03% recorded in August 2024.
Dr. Yudistira Hendra Permana, a lecturer at the Department of Economics and Business, UGM Vocational School (SV UGM), stated that Indonesia’s deflation is expected to persist until the end of the year.
He suggested that the Prabowo-Gibran administration should further investigate the underlying causes of this deflation and assess its short—and long-term effects to fully understand the general and gradual price reductions taking place.
Despite some debate surrounding deflation, Dr. Permana explained that it is often misunderstood as simply a period where goods and services are cheaper, benefiting consumers.
However, deflation signals a decline in the public’s purchasing power, with producers forced to lower prices.
“This situation is exacerbated by a decline in tax revenues due to reduced economic activity, which also carries the risk of unemployment,” Dr. Permana said during Sekolah Wartawan titled “Deflation in Indonesia: Analysis, Impacts, and Market Dynamics,” held at the UGM Central Office, on Thursday, Oct. 31, 2024.
He highlighted that farmers, fishermen, and micro, small, and medium enterprises (MSMEs) are the groups most affected by this deflationary condition.
“The ones most affected are farmers, fishermen, and MSMEs, as they deal with basic commodities,” he explained.
Dr. Permana predicted that the government’s projected tax revenues would certainly decline if the situation is not controlled, given the weakened economic activity and public purchasing power, especially with the recent wave of layoffs.
“The risk of deflation is tied to tax matters; if economic activity and purchasing power weaken, who will spend grandly? VAT and income taxes will fall,” he said.
In terms of monetary and fiscal policy, Dr. Permana urged the government to evaluate several projects that he believes have been misdirected and have wasted resources, ultimately affecting the national budget unproductively.
“The government should be able to select and prioritize projects that do not destabilize the economy,” said the Head of the Property Management and Appraisal Program at SV UGM.
He also warned that prolonged deflation could lead to the risk of an economic crisis, as gradually, basic food prices could rise while consumers’ purchasing power remains low.
To address this, Dr. Permana hopes that controlling institutions will be able to stimulate aggregate demand through monetary and fiscal policies and by supporting businesses and projects that are on the right track.
“We need policies that can boost the public’s purchasing power,” he added.
“The decline in public purchasing power is due to economic pressure. Even though the exchange rate of the rupiah is stable and strong, if people’s purchasing power weakens, everything still feels expensive.”
Author: Bolivia
Editor: Gusti Grehenson
Post-editor: Lintang Andwyna Nurseisa Azrien
Photographer: Donnie