Inflation In Countries And What Causes Of It

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 decrease in people’s purchasing power can be seen quantitatively from the number of goods purchased with the same budget, when prices rise, people will buy less.

The increase in the price level is often expressed as a percentage. The opposite of inflation is deflation. Before knowing how to deal with inflation, please note that inflation is divided into several types.

There are three types of inflation, namely inflation from the demand side (demand-pull inflation), inflation from the supply side (cost-push inflation), and congenital inflation. Then, Here is the explanation:

1. Demand-pull Inflation

Inflation in these countries occurs when an increase in the supply of money and credit stimulates overall demand for goods and services that grows faster than the productive capacity of the economy. This increases demand and raises prices.

The more money available to consumers, consumer demand for goods and services increases. There is a gap between supply and demand, which reduces supply and increases the price of available commodities.

2. Cost-push inflation

Inflation in countries is caused by a cost push, which is the result of rising prices in the production process. When additional supplies of money and credit are channeled into commodity or asset markets, the cost of raw materials is investigated.

This results in higher costs for the production process, which results in higher prices for goods and services for the final consumer.

3. Built-in Inflation

Inflation in countries is related to adaptive expectations, i.e. people predict and predict the current rate of inflation will continue into the future. When the price of goods and services rises, workers and laborers expect wages to also rise.

However, an increase in wages also increases the cost of goods and services. This causal cycle between prices and wages continues to roll and influence 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 a growing economy, unemployment will fall, wages will rise, and the purchasing power of many people will automatically increase, allowing them to consume tertiary goods.

This high demand drives prices up.

In this context, national inflation is seen as positive.

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 higher tariffs, the capital spent by companies to purchase raw materials and operating costs will be higher.

For example, an increase in electricity rates for industry or an increase in fuel prices based on government policies, will automatically increase industrial operating costs.

The company also imposes higher costs on consumers in the form of price increases. This is what causes cost-push inflation.

4. National Debt Management

When the national debt skyrocketed, one of the government’s solutions was to increase taxes to pay off the debt.

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.