There is Deflation Ahead of Ramadhan 2025, How is the Condition of People's Purchasing Power?

In Indonesia, Ramadan is not merely a month of worship but also a moment for economic activity to accelerate. It is common that before and during Ramadan, inflation tends to rise due to increased demand for goods and services within the community.

Ramadhan and Eid al-Fitr are always the main factors driving economic growth at the beginning of the year. Along with the increase in demand, public consumption is more intense. From basic needs and worship to tertiary matters, such as entertainment and fashion.

Therefore, the release of the Consumer Price Index (CPI) or February 2025 inflation data by the Central Statistics Agency (BPS) earlier this week was quite surprising and concerning. Instead of increasing, the CPI one month before Ramadan actually declined, experiencing deflation on both a monthly and annual basis.

The monthly deflation rate (month to month) was recorded at 0.48 percent and the annual deflation (year on year) was 0.09 percent. The commodities that contributed the most to deflation included electricity tariffs, rice, broiler chicken, shallots, tomatoes, and red chilies.

BPS noted that the last time annual deflation occurred was 25 years ago or at the turn of the millennium, aka the year 2000.

Indeed, the February 2025 deflation was predominantly caused by the 50 percent electricity tariff discount provided by the Prabowo Subianto administration during the January-February period. This policy, aimed at maintaining the public's purchasing power at the beginning of the year, contributed to deflation during the first two months of 2025.

However, several groups believe that weak purchasing power is a contributing factor to the deflation ahead of Ramadan. The Executive Director of the Center of Reform on Economics (CORE) Indonesia, Mohammad Faisal, stated that aside from electricity tariff discounts, deflation occurred in several food commodities, although not as deep as the deflation in electricity tariffs.

"If we observe deflation in food and beverages, it is unusual. This is because, approaching Ramadan, there should typically be inflation in those commodities. Usually, the inflation rate is slight in February, then increases during Ramadan (March) and Eid (early April). However, this time it is not the case," said Faisal on Saturday (8/3/2025).

He suspects that this is more due to a decline in demand from the public rather than an oversupply factor. This is because the harvest season has only just begun in several regions, so there has not yet been a significant increase in food supply in the market that would lead to an abundance of stock and a drop in prices.

"That means, this is likely driven more by demand factors or the demand side that is not increasing. This can be seen as a reflection of people's purchasing power that has not really recovered," he said.

The awareness of saving is not based on a secure financial condition. However, it is to anticipate worse economic conditions in the future.

Various economic stimuli provided by the government at the beginning of the year, including electricity tariff discounts, can indeed ease the burden on the community. However, its nature is only to keep purchasing power from declining further, not to increase purchasing power significantly.

In other words, people are still facing the issue of weakening purchasing power, but not worse than before. "The stimulus has not increased and improved purchasing power, but only so that it does not shrink. So that at least the economy at the beginning of the year continues to grow at 5 percent," said Faisal.

Deflation or the condition of falling prices of goods and services in society is not always good. Deflation in a positive sense can occur when the business world is in a healthy condition and is able to produce goods and services in greater quantities than what society needs. When that happens, the prices formed in the market fall.

However, deflation can also have a negative meaning, namely if it is driven by weakening demand. The falling demand can occur due to the weakening of people's financial ability to shop, or because people choose to save their money rather than use it for shopping. Both reflect unhealthy economic conditions.

According to an Economics Lecturer from the Islamic University of Indonesia (UII), Abdul Malik, with the background of cases of layoffs (PHK) that are currently rampant in various sectors at the beginning of the year, the rare phenomenon of deflation before Ramadan cannot be underestimated.

"This symptom is worrying ahead of Eid al-Fitr. When public spending is low when it should be high, the decline in demand for goods and services will be a feedback that makes the economy even sluggish, which will potentially lead to further layoffs," Abdul said.

He assessed that the decreasing demand before fasting occurred because the middle class was doing precautionary saving, aka saving just in case. The awareness of saving did not come from a safe financial condition. However, it was to anticipate worse economic conditions in the future.

The worsening economic signals are starting to appear from at least two things. First, the rampant cases of layoffs in various sectors at the beginning of this year. Second, the sluggish condition of the business world due to the impact of the government's budget efficiency policy.

The current annual deflation is more worrying than the last annual deflation that occurred in 2000.

Abdul said that the weakening of purchasing power and precautionary saving are highly dependent on public expectations and are perceptual in nature. When someone faces the prospect of falling income and is worried that it will happen for quite a long time due to the worsening economy, they will be more careful in spending money.

"So that their precautionary savings are higher. People will tighten their belts when there is concern that in the near future their income will decrease," he said.

The government hopes that electricity tariff discounts can encourage people to shop more and drive consumption. However, it is likely that the savings will be saved. Either saved for homecoming and celebrating Lebaran a month from now, or saved for a longer period as an anticipatory measure.

Abdul believes that the current annual deflation is more worrying than the last annual deflation that occurred in 2000. The deflation in early 2000 was more of an effect of the adjustment of the price system that had been turned upside down due to the 1998 crisis.

The volatile exchange rate conditions at that time had a major impact on the pricing system. This is because many domestic products require imported raw materials that must be purchased with foreign currency. Currently, he said, the conditions are more worrying.

"The deflation that occurred in 2000 was a side effect after the main crisis had passed and we were in the process of reorganizing. Currently, deflation occurs when we are in a position of waiting and worrying about the potential for a future crisis," said Abdul.