In the face of economic upheaval, you need to know how to deal with inflation in countries. Especially in a pandemic condition that makes the economy fluctuate.
However, before knowing how to deal with inflation, you need to first know what inflation is.
What is Inflation?
Reporting from the page of the International Monetary Fund, inflation is a decrease in the purchasing power of certain currencies over time.
The decline in people’s purchasing power can be seen quantitatively from the number of goods purchased with the same budget. As prices increase, people will buy less.
The increase in the price level is often expressed as a percentage. This percentage represents one unit of currency buying less than it did in the pre-inflation period.
The opposite of inflation is deflation. Deflation is a condition when the purchasing power of money increases and prices fall.
Before knowing how to deal with inflation, you need to know that inflation is divided into several types. If you already know what type of inflation you are facing, you can also determine how to deal with inflation.
There are three types of inflation. The three are inflation from the demand side (demand-pull inflation), inflation from the supply side (cost-push inflation), and built-in inflation. Here is the explanation:
1. Demand-pull Inflation
This inflation in countries occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase faster than the production capacity of the economy. This increases demand and causes price increases.
With more money available to consumers, consumer demand for goods and services increases. There is a gap between supply and demand, so that the supply is less and the prices of available goods are more expensive.
2. Cost-push inflation
Inflation in countries caused by a cost push, which is a result of price increases in the production process. When an additional supply of money and credit is channeled into the commodity or asset market, the cost of raw materials rises.
This results in higher costs for the production process, thus leading to higher prices for goods and services for final consumers.
3. Built-in Inflation
Inflation in countries is related to adaptive expectations, i.e. people estimate and expect the current rate of inflation to continue into the future. When the price of goods and services rises, workers and laborers expect wages to rise as well.
However, an increase in wages also increases the cost of goods and services. This causal cycle between prices and wages is constantly rolling and influencing each other.
Causes of Inflation
Inflation in countries certainly doesn’t just happen. There are reasons why the three types of inflation mentioned earlier can occur.
The following are some of the common causes of inflation. By knowing the cause, we can also know how to deal with inflation.
1. The occurrence of economic growth
In countries experiencing economic growth, the unemployment rate decreases and wages rise. Automatically, many people whose purchasing power also increases and are able to consume tertiary goods.
This high demand causes prices to rise. This in turn will lead to more jobs to meet the high demand.
In this context, inflation in countries is seen as a positive thing. However, a country needs to control so that the inflation rate is not too high.
2. Increased Money Circulation
If the money supply increases, exceeding the rate of economic growth, inflation will certainly occur. With more money in circulation, demand will increase and prices will skyrocket.
That’s why Bank Indonesia can’t just print new money. This is to keep the inflation rate at a healthy level.
3. Government Policy
If the government imposes new regulations or tariffs that are more expensive, the capital spent by companies to buy raw materials and operational costs will be higher.
For example, an increase in electricity rates for industry or an increase in fuel prices based on government policies, the operating costs of the industry will automatically increase.
Companies also charge higher costs to consumers in the form of price increases. This is what causes cost-push inflation.
4. National Debt Management
When the national debt is skyrocketing, one of the government’s solutions is to increase taxes to pay debts.
High tax collections on companies will make companies charge price increases to consumers. This is also what causes cost-push inflation.
5. Changes in Exchange Rates
When the value of the rupiah decreases in relation to foreign currencies, the rupiah has less purchasing power. Imported products that enter Indonesia become more expensive to buy.
The depletion of foreign exchange reserves was also a major factor in the decline in the value of the rupiah. To strengthen foreign exchange reserves, it is necessary to increase exports rather than imports.