Purchasing Power & Precautionary Savings: An Economic Explanation
- Jakarta - The decline in Indonesian purchasing power in early 2025 has become a focal point of economic discussion, with some experts suggesting a rise in precautionary saving...
- The Consumer Price Index (CPI), a measure of inflation, released by the Central statistics Agency (BPS) in February 2025, indicated that Indonesia experienced deflation for two consecutive months.
- Several commodities contributed to the deflation, including electricity, rice, broiler meat, onions, tomatoes, and red chili peppers.
Indonesian Purchasing Power Declines Amid Deflation, Sparking Economic Concerns
Table of Contents
- Indonesian Purchasing Power Declines Amid Deflation, Sparking Economic Concerns
- Indonesian Economic Concerns: Declining Purchasing Power and Deflation
- What is Happening to the Indonesian Economy in Early 2025?
- What is Deflation, and Why is it occurring in Indonesia?
- What is Causing the Decline in Purchasing power?
- What are the Potential Consequences of Declining Purchasing Power and Deflation?
- What is Causing precautionary Saving in Indonesia?
- Key Economic Indicators in Early 2025
- What Measures can the Government Take to Address This Economic situation?
Jakarta – The decline in Indonesian purchasing power in early 2025 has become a focal point of economic discussion, with some experts suggesting a rise in precautionary saving as a contributing factor.
The Consumer Price Index (CPI), a measure of inflation, released by the Central statistics Agency (BPS) in February 2025, indicated that Indonesia experienced deflation for two consecutive months. the monthly deflation rate was -0.48%, and the annual deflation (year-on-year) was -0.09%.
Several commodities contributed to the deflation, including electricity, rice, broiler meat, onions, tomatoes, and red chili peppers. The BPS reported that this was the first annual deflation in 25 years.
An economist noted the meaning of this trend, stating,
This shows a meaningful decline in public consumption, which is usually the main driver of economic growth in the month of Ramadan.
The economist suggested that the precautionary saving
phenomenon might be driving this trend.
Precautionary Saving as a Potential Cause
Data from the Mandiri Spending Index (MSI) indicates a decrease in non-essential spending. Spending on entertainment, sports, and recreation decreased from 7.7% to 6.5%, while supermarket spending increased to 15.9%, suggesting a shift toward basic needs. This shift is being described as precautionary saving.
The economist explained,
This phenomenon is known as a precautionary saving, where people prefer to save money as a form of anticipation of future economic uncertainty, which then has an impact on the pattern of consumption.
This behavior is potentially driven by a high number of job terminations.Data from the Ministry of manpower indicates that approximately 77,965 workers lost their jobs throughout 2024, with an additional 3,325 affected by layoffs in January 2025.Layoffs at PT Sri Rejeki Isman Tbk (Sritex) in March 2025 resulted in more than 10,000 employees losing their income.
Increased unemployment might potentially be contributing to anxiety, forcing individuals to reduce spending on non-essential items.
The economist stated,
We know that household consumption plays a key role in encouraging economic growth. If consumption weakens, then aggregate demand has decreased, which has the potential to slow down overall economic growth.
Call for Government Intervention
The economist emphasized the need for government intervention to bolster purchasing power, given the importance of consumption in maintaining economic stability.
Potential measures include providing fiscal incentives for businesses to avoid layoffs, offering social assistance to vulnerable economic groups, and implementing policies that encourage growth in the retail and MSME sectors.
The economist concluded,
Without thes steps, the risk of economic stagnation will be even greater, which can then worsen the welfare of the community in the long run.
Indonesian Economic Concerns: Declining Purchasing Power and Deflation
What is Happening to the Indonesian Economy in Early 2025?
in early 2025, the Indonesian economy is facing challenges related to declining purchasing power. This is coupled with deflation, meaning that the general level of prices for goods and services is decreasing. This trend has sparked discussions among economists and the public, raising concerns about the country’s economic trajectory.
What is Deflation, and Why is it occurring in Indonesia?
Deflation is the opposite of inflation; it represents a decrease in the general price level of goods and services in an economy. The Consumer Price Index (CPI), released by the Central Statistics agency (BPS), is used to measure inflation and deflation. In February 2025,the BPS indicated that Indonesia experienced deflation for two consecutive months. the monthly deflation rate was -0.48%, and the annual deflation (year-on-year) was -0.09%. This marks the first annual deflation in 25 years.
Several factors have contributed to this deflation, including:
Decreased Prices of Essential goods: The prices of essential commodities like electricity, rice, broiler meat, onions, tomatoes, and red chili peppers have declined.
What is Causing the Decline in Purchasing power?
The decline in purchasing power is linked to a combination of factors, including a shift towards “precautionary saving.” This means that people are choosing to save more money and spend less. This is linked to economic uncertainty.
What is Precautionary Saving?
Precautionary saving is a behavior where individuals save money as a response to anticipated economic uncertainty.
What Data Supports the Shift Towards Precautionary Saving?
Data from the Mandiri spending Index (MSI) indicates the following:
Decreased spending on non-essential items like entertainment, sports, and recreation (from 7.7% to 6.5%).
Increased spending on basic needs, as seen through increased supermarket spending (to 15.9%).
What are the Potential Consequences of Declining Purchasing Power and Deflation?
The decline in purchasing power and deflation can have several negative consequences for the economy:
Reduced Consumption: A decline in public consumption, which is usually the main driver of economic growth, during the month of Ramadan, and overall.
Slower Economic Growth: The decrease in aggregate demand (the total demand for goods and services) can slow overall economic growth.
Economic Stagnation: If consumption continues to weaken, there is a risk of economic stagnation.
What is Causing precautionary Saving in Indonesia?
one of the driving forces behind precautionary saving is a rise in job terminations and general economic uncertainty.
increased Unemployment: Data from the Ministry of Manpower indicates that approximately 77,965 workers lost their jobs throughout 2024, with an additional 3,325 affected by layoffs in January 2025.
Major Layoffs in Early 2025: In March 2025,layoffs at PT Sri rejeki Isman Tbk (Sritex) resulted in over 10,000 employees losing their jobs.
Key Economic Indicators in Early 2025
| Indicator | Value | Notes |
| :—————————- | :——————- | :—————————————————————— |
| Monthly Deflation (Feb 2025) | -0.48% | Indicates a decrease in overall prices on a monthly basis.|
| Annual deflation (YoY) | -0.09% | The first instance of annual deflation in 25 years.|
| Unemployment (2024) | 77,965+ workers | Number of job losses across the country. |
| Jan. 2025 Layoffs | 3,325 | People affected by layoffs in January 2025. |
| Sritex Layoffs (March 2025) | 10,000+ | Number of employees laid off from PT Sri Rejeki Isman Tbk (Sritex). |
What Measures can the Government Take to Address This Economic situation?
Economists emphasize the need for governmental intervention to bolster purchasing power and stabilize the economy. Potential measures include:
Fiscal Incentives for Businesses: Providing incentives for businesses to avoid layoffs.
Social Assistance: Offering social assistance to vulnerable economic groups.
* Support for Retail and MSMEs: Implementing policies that encourage growth in the retail and MSME (Micro, Small, and Medium Enterprises) sectors.