February 03, 2025

Electricity Price Deflation

Market Commentary

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The first month of 2025 brought a big surprise! Indonesia's annual inflation rate plunged to 0.76%, a sharp drop from 1.57% in December 2024.

This is way below market expectations of 1.88% and even lower than our estimate of 1.25%.

Source: Trading Economics

Not only that, but on a monthly basis, Indonesia actually recorded deflation of 0.76%, reversing the 0.30% increase in consumer prices seen in December 2024.

Looking deeper into the inflation breakdown, some interesting trends emerge.

Core inflation, which reflects underlying price trends, rose slightly to 2.36% yoy from 2.26% in December 2024.

Source: Trading Economics

But the biggest surprise came from government regulated prices, which saw a steep deflation of 6.41% yoy, compared to 0.56% growth in the previous month.

The main driver? A massive drop in electricity tariffs!

Data shows that electricity prices plummeted by a staggering 32.03% mom, making the Housing, Water, Electricity, and Household Fuel sector the biggest contributor to deflation, both on a monthly and yearly basis.

On the other hand, food prices soared. Volatile food prices jumped to 3.07% yoy, up sharply from just 0.12% in December.

This reveals an interesting contradiction: normally, when food prices rise significantly, inflation should also increase.

But in reality, inflation dropped sharply, even turning into deflation on a monthly basis.

The drop in electricity prices certainly lightened household expenses, but it doesn’t seem to be enough to boost spending in other sectors.

Food prices went up, but if people still had strong purchasing power, overall inflation wouldn’t have fallen this much.

The reality? Consumers are likely cutting back on spending.

They may be buying less of the expensive food items or skipping non-essential purchases to manage their cash flow.

The pressure on food prices seems to be driven more by seasonal and weather related factors rather than structural inflation.

For example, the rise in cooking oil prices is likely due to seasonal trends, while the ongoing rainy season is disrupting agricultural production, pushing up prices of some food commodities.

This suggests that the food price increase is temporary, rather than a sign of long term inflationary pressure.

Interestingly, despite falling inflation, Indonesia’s industrial activity remains strong.

The latest S&P Manufacturing PMI rose to 51.9 in January, returning to expansion territory.

Source: Trading Economics

This indicates that even though domestic consumers may be more cautious with spending, production demand is still there, meaning businesses remain optimistic about future prospects.

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