Prices of essentials in Indonesia and other countries have been dropping. That’s not necessarily a good thing

He sells rice, oil, sugar and other daily essentials, but customers have been a relatively rare sight recently for Erick Saputra.

Mr Saputra, from Bukittinggi on the Indonesian island of Sumatra, said that for the past five months his small shop had made the equivalent of less than $30 per month.

That’s less than half of what he usually earns.

“It seems people are not spending as much anymore,” he told the ABC. 

While Australia has been suffering a persistent inflation problem in recent years, Indonesia is having the opposite issue.

The country’s Central Statistics Agency said it experienced 0.12 per cent deflation in September — the fifth month in a row.

And while most welcome decreasing prices, economists say it’s not necessarily a good thing. 

Why could falling prices be bad?

Deflation is when the price of goods and services declines. 

According to Indonesian Finance Minister Sri Mulyani Indrawati, the five consecutive months of deflation would be having a “positive” impact.

“It will significantly impact the purchasing power, especially for the lower-middle class who [proportionally] spend the most on food,” she told reporters early this month.

Essentially, food is becoming more affordable for those with fewer means. 

However, the decline in prices has come after they skyrocketed last year and wages did not keep up with the inflation.

The current deflation was “a warning” because it signalled consumers’ purchasing power was weakening, explained Eliza Mardian, a researcher at economic think tank Core Indonesia.

Put simply: prices are falling because there are fewer people who have enough money and the willingness to spend it.

Ms Mardian said the situation was “concerning” when prices of food and fresh produce, such as chillies, were cheaper than usual outside of harvest season.

“If demand keeps weakening, businesses, even farmers, will reduce their production activities … they will carry out cost efficiency which will result in reducing business expansion and can also lead to lay-offs,” she said.

Ms Mardian also said the number of people losing their jobs had contributed to weakened purchasing power in Indonesia.

Official data from Indonesia’s statistics agency showed about 60,000 people were laid off in October — an increase from 46,240 people in the same month last year.

“On top of that, we’ve also seen a drop in the middle class, with 9.5 million people falling out of that category,” Ms Mardian said.

In an effort to boost spending, last month Indonesia’s central bank cut interest rates for the first time in three years, chopping them down 25 basis points to 6 per cent.

Small enterprises hit hard

One of the small enterprises that has reduced production in recent months is run by Sri Handayuna.

Like many in the younger generations in Indonesia who have struggled to find jobs, Ms Handayuna started an online business to survive.

The target market for her fashion business is middle-class women.

But, because buying dresses and clothes wasn’t essential to people’s everyday needs, sales had dropped 50 per cent, she said.

“We lost our customers,” she told the ABC.

The drop in sales led to her reducing the number of garments her firm made, which in turn impacted her staff and other tailors from whom she used to order more.

“Me and the online small enterprise community really hope the new government will take action.”

Mr Saputra has similar hopes.

“We don’t want to lose our sources of income, we just want to make ends meet and live in peace,” he said.

Indonesia’s new President Prabowo Subianto said his government wants 8 per cent growth in the economy.

“It’s achievable — but only if he chooses the right engines to boost the economy,” Ms Mardian said.

China pumps money into economy to tackle deflation

Indonesia isn’t the only major economy having deflation issues. 

In China, production costs have been declining but people have continued to buy fewer goods and services. 

“While there has been some recent stabilisation, deflationary pressures persist in China,” said University of Sydney international business lecturer Wei Li.

“This situation highlights a supply-demand imbalance within the domestic market.”

Dr Li said that imbalance could affect employment rates and cause instability in financial markets.

Internationally, she said, it meant less demand for imported goods and services and reduced the number of tourists from China travelling abroad at just 60 per cent of pre-pandemic levels.

“China’s role as a major global consumer and producer means that deflation can have flow-on effects,” Dr Li said.

“Lower demand in China can lead to decreased production in other countries that export raw materials and intermediate goods to China.”

In response to the deflationary pressures, the People’s Bank of China has tried to fire up the economy with some of the biggest injections of cash into the economy since the pandemic.

“These include support for the real estate sector to help it recover from years of severe crises, as well as reductions in interest rates,” Dr Li said.

There were also subsidies for white goods and electric cars to boost spending, among other measures aimed at reducing youth unemployment and increasing demand from foreign markets. 

Dr Li said while deflation wasn’t necessarily a bad thing because it could indicate productivity improvements, sustained deflation could become a worry.

“It can precipitate an economic downturn as decreased demand leads to lower production, job cuts, and further declines in spending and investment,” she said.

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