In May 2025, Indonesia experienced a deflation of 0.37% month-on-month, marking a significant economic shift. This deflation, coupled with a shrinking trade surplus, indicates a cooling economy and raises concerns about future growth prospects.

Understanding the May 2025 Deflation

The Central Statistics Agency (BPS) reported a 0.37% deflation in May 2025, bringing the annual inflation rate down to 1.60% from 1.95% in April. This decline is attributed to several factors, including increased rice production, which rose by nearly 15% year-on-year, leading to lower food prices. Additionally, government policies, such as electricity tariff discounts, have contributed to the downward pressure on prices.

This deflation is part of a broader trend observed since late 2024, where Indonesia has experienced sustained deflationary pressures. Notably, this pattern is unusual during periods like Ramadan, which typically see increased consumer spending and inflation. The current deflation suggests weakened consumer demand and potential economic contraction.

Shrinking Trade Surplus: A Five-Year Low

In April 2025, Indonesia's trade surplus narrowed sharply to $160 million, the lowest since May 2020. This significant drop from March's $4.33 billion surplus is primarily due to a 21.84% year-on-year surge in imports, especially capital goods from China and Singapore. Meanwhile, exports increased by only 5.76% to $20.74 billion, with mining product shipments declining due to weak coal prices.

The U.S., a key trade partner, imported $2.08 billion in goods from Indonesia in April. However, these exports were affected by a new 10% U.S. tariff introduced in April. Indonesia is currently in negotiations with the U.S. to revise upcoming tariffs set to take effect in July.

Implications and Government Response

The combination of deflation and a shrinking trade surplus signals potential challenges for Indonesia's economy. Deflation can lead consumers to delay purchases in anticipation of further price drops, reducing aggregate demand and potentially leading to decreased production and employment. The shrinking trade surplus indicates a narrowing buffer against external economic shocks.

In response, the Indonesian government has implemented several fiscal stimulus measures to stimulate aggregate demand. These include providing Government-Borne Value-Added Tax (PPN DTP) for property purchases and incentives for environmentally friendly vehicles. Additionally, Income Tax Article 21 DTP incentives have been offered for labor-intensive sector workers with salaries up to Rp10 million per month.

The central bank has also taken action by cutting interest rates three times since September, aiming to stimulate economic activity within its 1.5%-3.5% target range. These measures are designed to counteract deflationary pressures and support economic growth.

Outlook and Considerations

While the government's interventions may provide short-term relief, sustained economic recovery will depend on restoring consumer confidence and demand. The upcoming Ramadan period, traditionally associated with increased consumption, could serve as a catalyst for economic activity. However, the effectiveness of this seasonal boost in the current deflationary context remains uncertain.

Monitoring global commodity prices, trade negotiations, and domestic consumption patterns will be crucial in assessing Indonesia's economic trajectory. Continued policy adjustments and targeted stimulus may be necessary to navigate the challenges posed by deflation and a shrinking trade surplus.