Inflation and deflation are two opposing economic phenomena, but both have a significant impact on people's lives and the direction of government policy. Inflation occurs when the prices of goods and services increase generally, while deflation reflects a sustained decline in prices. Both not only reflect economic conditions but also influence the behavior of consumers, producers, and investors.

The year 2025 marked a significant milestone in Indonesia's economic history. For the first time in 25 years, Indonesia experienced annual deflation. This sparked concerns about weakening purchasing power. However, the government emphasized that the deflation was the result of fiscal policies designed to maintain price stability and support purchasing power ahead of important events such as Ramadan and Eid al-Fitr.

This article will discuss the causes and impacts of inflation and deflation, including how government policies played a role in creating deflation in early 2025, and what this means for the future direction of the Indonesian economy.

Inflation and its impact on the economy

Inflation is a general and continuous increase in the prices of goods and services over a period of time. Inflation indicates a decline in the value of money. Therefore, with the same amount of money, people can buy fewer goods than before. For example, in 2019, according to data from the National Strategic Food Price Information Center (PIHPS), the average price of chicken eggs was Rp24,833 per kilogram. Compare this to the average price of chicken eggs in 2024, which reached Rp32,600 per kilogram. From this example, we can see that previously, with just Rp25,000 in 2019, you could buy 1 kilogram of chicken eggs, but with the same amount of money in 2024, you would get less than 1 kilogram of chicken eggs.

So, what causes inflation?

There are several types of inflation based on the cause:

Demand-Pull Inflation

This is inflation caused by a drastic increase in public demand while the supply of goods remains constant. For example, during Ramadan and the lead-up to Eid al-Fitr, public consumption surges. One reason is the policy of increasing employee holiday allowances (THR), which increases public demand for goods such as basic necessities.

Cost-Push Inflation

Inflation caused by rising production costs, which in turn causes producers to raise their selling prices. For example, if fuel prices rise, it will impact the logistics costs of shipping raw materials, or when global wheat prices rise due to supply shortages, this will affect production costs and selling prices.

Built-in Inflation

This type of inflation results from a recurring process driven by expectations among consumers and economic actors that prices will continue to rise. Consequently, they adjust their economic behavior to offset these increases. For example, if the price of fuel and basic necessities rises, workers will also demand a pay raise. Companies, of course, will raise prices to cover the costs of these increases. Rising prices make people perceive prices as increasingly expensive. Then, workers demand another pay raise in the following period, and the cycle repeats itself, creating a wage-price spiral.

Inflation itself has a broad impact on the economy. Some of its negative impacts include decreased purchasing power, economic uncertainty, increased cost of living, rising interest rates, unfair income redistribution, and price and market distortions. However, inflation can also have a positive impact on the economy, provided it is moderate and controlled. Managed inflation can actually stimulate economic growth, ease the debt burden, and facilitate price and wage adjustments. Therefore, low and stable inflation indicates a healthy and growing economy.

Deflation: Causes and Impact on the Economy

After understanding inflation, we also need to understand deflation and its impact on the economy. Deflation is a general and persistent decline in the prices of goods and services. In contrast to inflation, deflation increases the value of money. Therefore, with the same amount of money, people can buy more goods.

There are several main causes of deflation, namely:

Decrease in Aggregate Demand

This is the most common cause of deflation. Aggregate demand is the total demand for goods and services in the economy. Therefore, if consumer consumption, investment, government spending, and exports decrease simultaneously, prices of goods and services tend to fall. Examples include economic crises, recessions, pandemics, or global uncertainty.

Excess Supply of Goods and Services

This occurs when production exceeds market demand. For example, there's an oversupply of shallots of 100 quintals, while market demand is only 85 quintals. To prevent inventory from piling up in warehouses, producers lower prices to sell their stock. This situation can arise due to a bountiful harvest, increased production capacity, or sluggish demand.

Too Tight Monetary Policy

This is deflation that occurs when a central bank raises interest rates too high or aggressively suppresses the money supply. Money becomes more valuable, leading to lower consumption and investment, putting downward pressure on prices. This policy is often implemented to curb inflation, but if excessive, it can trigger deflation.

Global Economic Shock

Financial crises, geopolitical pressures, or health crises such as the COVID-19 pandemic can dampen global economic activity. This can result in decreased export demand, a stronger exchange rate, and sluggish investment. All of these factors can depress domestic prices, which in turn impacts commodity-producing countries like Indonesia.

Deflation certainly has an impact on the economy. When deflation occurs, many people postpone purchases, resulting in decreased consumption and investment. Corporate profits also decline, leading to layoffs and unemployment. Furthermore, the debt burden increases, increasing the real value of debt. Deflation is often considered more dangerous than inflation because it can trigger a prolonged recession.

Indonesia's Deflation in 2025: Results of Government Policy

At the close of 2024, Indonesia recorded inflation of only 1.7 percent. This was a controlled inflation rate, considered low compared to other countries in the world. Entering 2025, Indonesia experienced deflation of 0.09 percent (yoy) and 0.48 percent (month-on-month) in February 2025. This marked the first such phenomenon in 25 years. Naturally, this has sparked various views regarding the economic conditions and people's purchasing power.

Some economists believe that this deflation reflects a decline in people's purchasing power. The resulting price declines are seen as an indication of weakening consumer demand, which can negatively impact economic growth. For example, falling prices in housing, electricity, and food indicate an imbalance between supply and demand. If this trend continues, there are concerns it could lead to a further economic slowdown.

However, the current deflation in Indonesia is not actually the result of weakening purchasing power, but rather the result of government policies aimed at maintaining public purchasing power, especially in the lead-up to Ramadan and Eid al-Fitr.

What are these policies?

First, a 50 percent electricity tariff discount. This policy was implemented in January and February 2025. The State Budget allocated Rp13,615.8 billion for this policy. This electricity discount is provided to households with 450 VA, 900 VA, 1,300 VA, and 2,200 VA power consumption. In January, there were 71.1 million customers, and in February, there were 64.8 million customers who benefited from this electricity discount policy.

Second, the policy of reducing ticket and toll prices ahead of the Eid al-Fitr holiday. For two weeks during the Eid al-Fitr holiday period, March 24–April 7, 2025, there is a policy of reducing airline ticket prices by 13–14 percent. This discount applies to economy class according to the airline ticket and service group on 500 domestic routes. For this ticket discount, the State Budget has allocated a budget of IDR 286.1 billion for Government-Borne VAT. Furthermore, toll tariff discounts are also provided during the Eid homecoming holiday, both during the homecoming flow on March 24–27, 2025, and during the return flow on April 8–9, 2025. In fact, an additional tariff discount of up to 30 percent is also provided to travelers affected by the diversion of traffic via the Cisumdawu Toll Road.

Source: Ministry of Finance Opinion

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