Understanding inflation and how to overcome Inflation
Understanding Inflation. Inflation can be defined as the tendency of rising prices of goods and services generally held constant due to unequal flow of goods and the flow of money.
From this we can see the condition of a country that is experiencing inflation, namely:
1. Prices of goods in general will rise continuously
2. the money supply exceeds demand
3. value for money has decreased
The emergence of Inflation
The emergence of inflation can be seen from:
1. Based on the severity of inflation
- Inflation mild, below 10% a year
- Inflation is, between 10% - 30% a year
- Severe inflation, 30% - 100% a year
- Hyperinflation over 100% a year
2. Based on the incidence of inflation
- Inflation that comes from the domestic (domestic inflation), inflation was caused by state budget deficit and the resulting failure of the market price of basic needs to be expensive.
- Inflation comes from abroad (imported inflation), occurs because the increase in prices of goods in other countries, the production cost of foreign goods is high, the increase rate of imports of goods
3. Based on the causes of the emergence of inflation, can be classified:
a. Pull demand (demand pull inflation)
This inflation occurs because the aggregate demand will continue to various items
increases, for example:
- Increase in government spending financed by printing new money
- Increase in private investment spending because of the ease of bank credit
Description:
P = Price equilibirium (price before the increase)
S = Supply (supply) which is assumed to be fixed
D = Demand (demand) before experiencing a change
D '= Demand (demand) after experiencing a change, increased due to increased purchasing power
P '= Price (price) after an increase due to shifting demand (D) of
D to D '
b. Pressure cost (cost push inflation)
This inflation caused by rising production costs, usually beginning with:
- Increase in production costs, such as wage increases, rising prices of capital
- Reduction in the number of bidding
- Rising prices coupled with decreasing number of production
P = Price Equilibrium (initial price)
D = Demand (demand) is assumed to be fixed
S = Supply (supply)
S '= Supply (quote after decreases)
P '= Price (price) after an increase due to reduced supply from S to S'
Q = quality of goods
c. Inflation mixture, due to a combination of elements and pull inflation cost-push inflation.
d. Imported inflation, due to the influence of foreign inflation and the existence of trade between countries.
For example: a country experiencing inflation, then the production of these countries
required by other countries and imported, the price of these goods increased.
HOW TO OVERCOME INFLATION
Efforts to overcome inflation should start from the causes of inflation in order to find a way out. Theoretically to cope with inflation is relatively easy, in particular by overcoming the main base, reducing the amount of money in circulation.
The following policies are expected to tackle inflation:
1. Monetary policy, all government policies in the monetary field with the aim of maintaining monetary stability to improve the welfare of the people.
These policies include:
a. Politics discounts, by reducing the money supply by raising interest rates, it is expected the demand for credit will be reduced.
b. Open market operations, reducing the money supply by selling SBI
c. Increase cash reserves, so the money is distributed by commercial banks to be reduced
d. Selective credit, central bank policy to reduce the amount of money in circulation by means of granting credit
e. Politics sanering, this is done when it happened hyper inflation, BI was never done on December 13, 1965 which cut the money from Rp.1.000 be Rp.1
2. Fiscal Policy, can be done by:
a. raise tax rates, expected by society to deposit some more money to the government as tax payments, thus reducing the amount of money in circulation.
b. Organize government revenues and expenditures
c. Conducting government loans, such as cutting government civil servant salaries 10% for savings, this happened during the old order.
3. Non-Monetary Policy, can be done through:
a. Increase production, the Government provides subsidies to the industry to be more productive and produce more output, so the price will be down.
b. Wage policy, the government appealed to unions not to ask for a raise while being inflation.
c. Supervision prices, government policies to determine the maximum price for the goods -
certain goods.
