The decline in the purchasing power of the Indonesian people recently has become a serious concern for economists and business actors. This weakening of purchasing power impacts household consumption, which has been the main driver of the economy. This phenomenon risks triggering a deflationary spiral, a situation where the decline in prices continues due to low demand and consumption, which in turn deepens the price decline and worsens the Indonesian economy. 

According to data from the Central Statistics Agency (BPS), Indonesia experienced a monthly deflation of 0.18 percent in July 2024, with the Consumer Price Index (CPI) reaching 106.09. This deflation reflects a trend of declining prices that has occurred for three consecutive months. Furthermore, the deflation rate in July was recorded to be deeper compared to the deflation in June, indicating a sustained decrease in public demand and consumption.

Here are some key factors causing the decline in people's purchasing power:

1. Inflation and price fluctuations of goods

"Although deflation has occurred in the last few months, the cost of living for the community remains high. The rise in food and energy prices has forced many people to cut back on consumer spending to meet basic needs. High inflation in certain sectors exacerbates this condition."

The occurrence of this inflation also impacts the decline of the middle class. The Minister of Finance (Menkeu) Sri Mulyani has her own views on the causes of the decline of several middle-class groups.

"The decline of the middle class is usually due to inflation. With high inflation, the poverty line rises, and they will suddenly fall below it," said Sri Mulyani at the Ministry of Finance or Kemenkeu in Jakarta, Friday, October 4, 2024.

Meanwhile, regarding deflation, the Director of the Institute for Development of Economics and Finance (INDEF) Tauhid Ahmad explained that this condition can be seen from volatile food or the category of volatile commodities such as broiler chicken, eggs, and red onions. This category is a basic necessity for the community that should continue to be consumed, even though its prices fluctuate.

"But when the public has no purchasing power, in the end, they cannot afford it, which causes prices to drop. And that leads to deflation," explained Tauhid to Tempo, Thursday, October 3, 2024.

"In addition to recording deflation, it also refers to the Purchasing Manager’s Index (PMI) data for Indonesia's manufacturing sector, which recorded a decline to the contraction zone at a level of 49.2 in September 2024. This contraction trend has been ongoing since July, indicating a consistent decline in industrial activity."

Tauhid also mentioned that a manufacturing PMI number below 50 indicates that the goods sold are fewer than the inputs purchased by the industry. This means there is an excess stock in the industry due to a lack of buyers. However, Tauhid said that this condition is currently not only happening in Indonesia.

Furthermore, one of the main factors affecting the purchasing power of the community is the price level of goods and services. When prices rise, the ability of the community to purchase goods and services decreases. Conversely, if prices fall, the purchasing power of the community will increase because they can get more with the same amount of money. Therefore, to assess purchasing power, it is very important to first analyze price movements in the market.

2. Termination of Employment (Layoff)

The wave of layoffs in the formal sector due to economic instability has led to an increase in the number of unemployed. This forces people to rely on savings or seek income in the informal sector, which tends to be unstable.

On the other hand, Tauhid added that the factor which he believes is an indicator of weakening purchasing power is the decline in BPJS Employment participants. Referring to BPJS Employment data for the period of January 2023 to May 2024, there is a decline in the trend of active participants by 4.27 percent in the garment and ready-made clothing sector.

3. Real income that does not increase

Real income, which is income adjusted for changes in prices, becomes the main factor influencing the purchasing power of the public. If real income increases, a person's ability to buy goods and services also rises compared to before. However, for purchasing power to truly increase, the rise in income must be higher or at least proportional to the rise in prices in the market. If nominal income rises but the prices of goods and services also increase at the same rate, purchasing power does not experience a real increase.

4. Draining savings for daily needs

Tauihid assesses that the decline in people's purchasing power can also be caused by informal sector workers who choose to independently stop their participation due to a decrease in their income. The lack of support from companies forces them to bear the costs themselves, and in a difficult economic situation, many are forced to prioritize basic needs.

"Looking at the data from LPS, I think it shows that those who initially saved have to take it out for daily needs. The public must tighten their belts again," he concluded.

5. The minimum number of job opportunities

The decline in the purchasing power of the community is often linked to the limited job opportunities. When the job market is insufficient, the unemployment rate will increase, causing many people to struggle to earn an income. This situation affects the community's ability to shop, as without adequate income, they are forced to hold back on consumption and reduce their purchases of goods and services.

6. Taxes

Tax increases tend to reduce the purchasing power of the public because taxes decrease real income. Taxes deducted from earnings mean that when taxes rise, real income decreases, so a person will have a lower ability to purchase goods and services compared to before the tax increase. This can reduce the level of consumption, which is a key factor in driving economic growth. Therefore, higher taxes will usually slow down the economic growth of a country.

7. Availability of credit and debt burden

People often buy expensive goods or services using credit. If the item is very much needed, they will seek loans to fulfill it.

Therefore, the availability of credit from financial institutions, both for companies and consumers, has a significant impact on the purchasing power of the public. With good access to credit from banks, both companies and consumers can spend more, which in turn will increase purchasing power. In addition, financial institutions also benefit from loan interest, thus more money circulates in a country's economy.

Source: Department of Trade 

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