Deflation Grips Indonesia

In February 2025, the Indonesian Central Statistics Agency (BPS) reported a deflation rate of -0.48% for the month and an annual deflation rate of -0.09%.This marks the first annual deflation in the nation in 25 years. Declining prices for essential commodities like electricity, rice, chicken, onions, tomatoes and red chili contributed substantially to this trend.

This might sound like good news for consumers on the surface, but economists are concerned that it reflects a deeper problem: a lack of demand. When people expect prices to fall further, they delay purchases, leading to a vicious cycle of falling prices and reduced economic activity.

As Fatkur Huda, an economist, noted, “This shows a meaningful decline in public consumption, which is usually the main driver of economic growth.” He pinpoints “precautionary saving” as a primary driver of this phenomenon.

What is Precautionary saving?

Precautionary saving occurs when individuals increase their savings in response to economic uncertainty. Faced with the possibility of job loss, wage cuts, or a general decline in economic conditions, people prioritize saving over spending.

Huda points to the Mandiri Spending Index (MSI) as evidence. The MSI indicates a shift away from discretionary spending. “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,” he explained.

Specifically, the index showed a decrease in spending on entertainment, sports, and recreation (from 7.7% to 6.5%), coupled with an increase in supermarket spending (to 15.9%). This suggests that Indonesians are focusing on basic needs and cutting back on non-essential purchases, similar to trends seen in the U.S. during periods of economic anxiety.

The Layoff Link: A Cautionary Tale for the U.S.

A major factor fueling precautionary saving in Indonesia is a surge in layoffs. The Ministry of Manpower (Kemenaker) reported that nearly 78,000 workers lost their jobs in 2024, with another 3,325 layoffs in January 2025. The collapse of textile giant PT Sri Rejeki Isman tbk (Sritex) on March 1, 2025, resulted in over 10,000 job losses alone.

Thes job losses are creating a climate of fear and uncertainty, leading people to hoard cash and postpone spending. The situation is a stark reminder of the potential consequences of mass layoffs in the U.S., especially in sectors vulnerable to automation or global competition.

Economists worry about the ripple effect. “We certainly know that household consumption plays a key role in encouraging economic growth. If then consumption weakens, then aggregate demand has decreased, which has the potential to slow down overall economic growth,” stated Huda.

U.S. Parallels: Are We Headed Down the Same Path?

While the U.S. economy is currently stronger than IndonesiaS, ther are troubling parallels. Inflation remains a concern, and many Americans are still feeling the pinch from rising prices. high interest rates, intended to combat inflation, are also making it more expensive for businesses to borrow money and invest, potentially leading to slower growth and job losses.

Furthermore, the rise of automation and artificial intelligence is threatening jobs in various sectors, from manufacturing to customer service. As Americans worry about their future employment prospects, they may start to engage in precautionary saving, mirroring the situation in Indonesia.

Policy recommendations and Interventions

The Indonesian case highlights the importance of government intervention to stimulate demand and prevent a deflationary spiral. Huda emphasizes the need for the government to boost purchasing power. This can be achieved through:

• Fiscal incentives for businesses: To discourage layoffs and encourage investment. In the U.S., this could take the form of tax credits for companies that invest in worker training and upskilling.
• Social assistance for vulnerable groups: To provide a safety net for those who lose their jobs or experiance income reductions. This could include expanded unemployment benefits, food assistance programs, and housing subsidies.
• Policies to support retail and MSMEs: To encourage local businesses’ growth and create jobs. This could involve reducing regulatory burdens, providing access to capital, and promoting entrepreneurship.

According to Huda, “Without these steps, the risk of economic stagnation will be even greater which can then worsen the welfare of the community in the long run.”

Conclusion: An Ounce of Prevention

the economic challenges facing Indonesia offer valuable lessons for the U.S.By monitoring key indicators like inflation, unemployment, and consumer spending, policymakers can identify potential risks early on and take proactive measures to prevent a similar scenario from unfolding. Investing in worker training, strengthening the social safety net, and promoting economic growth are essential steps to ensure a stable and prosperous future for all Americans.