Indonesia's Lowest Inflation In History, IDEAS Highlights The Impact Of Lowering Purchasing Power

Tax illustration (ANTARA)

JAKARTA - The Central Statistics Agency (BPS) recorded Indonesia's inflation in 2024 at 1.57 percent, the lowest figure in history, even lower than inflation in 2020 which reached 1.68 percent when the COVID-19 pandemic hit.

BPS said that the main cause of this low inflation was the decline in staple food prices after previously experiencing a high spike in 2022 and 2023.

Institute for Democracy and Affluence Studies (IDEAS) researcher, Tira Mutiara, explained that the low inflation in 2024 was influenced by the decline in people's purchasing power. This is due to the weakening of the middle class and the uncertainty in the direction of government policies, especially regarding the plan to increase VAT 12 percent.

"The decrease in people's purchasing power can be seen from household consumption data. Since the fourth quarter of 2023, household consumption growth has always been lower than economic growth," he said in his statement, Sunday, January 5.

Tira explained, based on BPS data, in the fourth quarter of 2023, Indonesia's economic growth was recorded at 5.04 percent (YoY), while household consumption only grew 4.46 percent (YoY). This trend continues in the first quarter of 2024 with 5.11 percent economic growth (YoY) and 4.91 percent household consumption (YoY).

In the second and third quarters of 2024, household consumption growth was stagnant at 4.91 percent (YoY), below economic growth of 5.05 percent and 4.95 percent (YoY), respectively.

"In addition, a decrease in consumption is also seen in the Consumer Confidence Index (IKK), which was recorded at 123.3 in June 2024, lower than in May 2024 which was 125.2," he said.

Tira added that in July and August, IKK had experienced a slight increase, namely 123.4 and 124.4, but fell again in September (123.5) and October (121.1).

In a survey by Bank Indonesia (BI) consumers, it was revealed that community groups with expenditures of IDR 3.1 million - IDR 4 million experienced the deepest decline in IKK in October, which was 5.7 points. The expenditure group of IDR 4.1 million - IDR 5 million decreased by 1.9 points, and the expenditure group of IDR 2.1 million - IDR 3 million also decreased by 1.2 points.

"The middle class group has dropped its confidence the most," he explained.

Tira stated that this low consumption and purchasing power was triggered by the decline in the number of middle classes which had previously been the main support for Indonesia's economic growth.

"Middle class has an important role in encouraging higher domestic consumption because they tend to have a higher consumption rate than the lower class and higher income from the lower class," he said.

According to Tira, the decline in middle class spending has the potential to slow down the economy. Economic uncertainty and government policies also make economic actors, both individuals and businesses, wait and see (wait and see).

"Business actors and the public tend to refrain from investing or spending large consumption so that there is certainty regarding government policies," he said.

In this uncertainty situation, Tira revealed that people are reluctant to take risks, which ultimately hamper economic growth. This phenomenon also makes economic actors delay decisions, avoiding loss (loss aversion).

"The phenomenon of the 12 percent VAT increase policy is a real example, where people hold back consumption and prepare to face the increase," he added.

Tira emphasized that although this policy was eventually canceled, the Government's changing attitude in decision making had a major impact on the dynamics of the economy.

"In this condition, the Government is expected to provide a positive signal and certainty regarding the policies that will be implemented, to revive the sluggish Indonesian economy," he concluded.