Indonesia’s Purchasing Power Declines in Early 2025, Precautionary Saving Suspected as Key Factor

The decline in Indonesia's purchasing power in early 2025 has drawn significant attention. Economic experts suspect that this trend is driven by precautionary saving, where people choose to save money as a precaution against economic uncertainty.

Economic expert Fatkur Huda from Muhammadiyah University of Surabaya (UM Surabaya) pointed out that data from Indonesia’s Central Statistics Agency (BPS) shows that the Consumer Price Index (CPI) or inflation for February 2025 recorded deflation for two consecutive months. The monthly deflation stood at -0.48%, while the year-on-year deflation was -0.09%.

Several commodities contributed to this deflation, including electricity tariffs, rice, broiler chicken meat, shallots, tomatoes, and red chili peppers. BPS also reported that this marks Indonesia’s first annual deflation in 25 years.

"This indicates a significant decline in household consumption, which is usually a key driver of economic growth, particularly during Ramadan," Fatkur stated in UM Surabaya’s official publication, Tuesday (March 25, 2025).

Precautionary Saving Blamed for Weakening Purchasing Power

Fatkur referenced data from the Mandiri Spending Index (MSI), which revealed a sharp decline in non-essential spending. Spending on entertainment, sports, and recreation dropped from 7.7% to 6.5%, while supermarket spending increased to 15.9%, indicating a shift towards basic necessities.

"This phenomenon is known as precautionary saving, where people choose to save money instead of spending due to concerns about future economic uncertainties, which ultimately affects consumption patterns," he explained.

A key factor driving precautionary saving is the rising number of layoffs (PHK). According to Indonesia’s Ministry of Manpower (Kemenaker), 77,965 workers lost their jobs in 2024, with an additional 3,325 workers affected by layoffs in January 2025. Moreover, mass layoffs at PT Sri Rejeki Isman Tbk (Sritex) on March 1, 2025, resulted in over 10,000 employees losing their livelihoods.

This situation has contributed to rising unemployment rates, leading households to reduce spending on discretionary goods and services.

"We know that household consumption plays a crucial role in driving economic growth. If consumption weakens, aggregate demand will also decline, which could potentially slow down overall economic growth," Fatkur noted.

Government Urged to Take Immediate Action

Fatkur emphasized that the government must take decisive action to boost household purchasing power, as consumption is a fundamental pillar of economic stability.

Proposed measures include fiscal incentives for businesses to prevent further layoffs, social assistance for vulnerable economic groups, and policies aimed at stimulating the retail and SME sectors.

"Without these steps, the risk of economic stagnation will increase, potentially worsening long-term public welfare," he concluded.