Understand Inflation: Causes, Types, Impacts, and Theory of Inflation

Definition of Inflation in general

What is meant by inflation (inflation) ? Understanding Inflation is a state of the economy in a country where there is a tendency to increase prices of goods and services in general in a long time (continuous) due to the unequal flow of money and goods.

Temporary price increases are not included in inflation, for example increases in prices ahead of the Idul Fitri holiday. In general, inflation occurs when the amount of money circulating in the community is more than needed.

Inflation is an economic phenomenon that cannot be completely eliminated. The various efforts taken are usually limited to controlling inflation.

Understanding Inflation According to Experts

In order to better understand what inflation means, we can refer to the opinions of the following experts:

1. Boediono

According to Boediono, the notion of inflation is a tendency regarding prices to rise generally and continuously.

The situation when the price of one or several goods rises, then it can not be said to be inflation. However, if the price of goods that rises is widespread and causes an increase in most of the other items that is called inflation.

2. Winardi

According to Winardi, the notion of inflation is a period in a certain period, where there is a decrease in buying power over monetary unity. Inflation can arise if the value of money deposited circulates more than the amount of goods or services offered.

3. Sadono Sukirno

According to Sadono Sukirno, the notion of inflation is a process of rising prices that occur in an economy.

4. Dwi Eko Waluyo

According to Dwi Eko Waluyo, the meaning of inflation is a form of economic diseases that often arise and are experienced in almost all countries. The tendency of rising prices in general and occurs continuously.

5. Indonesia Bank (BI)

According to Bank Indonesia (BI), the notion of inflation is the tendency of prices to increase generally and continuously.

Causes of Inflation

Understanding inflation and its causes

As mentioned in the definition of inflation above, inflation does not just happen, but is caused by various factors. In general, the cause of inflation is due to an increase in demand and production costs.

In full, here are some causes of inflation:

1. Increased Demand (Demand Pull Inflation)

Inflation that occurs is due to an increase in demand for certain types of goods / services. In this case, the increase in demand for the type of goods / services occurs in the aggregate (aggregate demand).

This happens can be caused by several factors, including:

  • Increased government spending.
  • Increased demand for goods to be exported.
  • Increased demand for goods for the private sector.

2. Increased Production Costs (Cost Pull Inflation)

Inflation that occurs due to increased production costs. As for the increase in production costs caused by rising prices of raw materials, for example:

  • Fuel prices go up
  • Labor costs are rising

3. High Circulation of Money

Inflation that occurs because the money circulating in the community more than needed. When the amount of goods is fixed while the money in circulation has doubled, prices can increase by up to 100%.

This can happen when the government implements a budget deficit system, where the budget deficit is overcome by printing new money. But this makes the amount of money circulating in the community increase and cause inflation.

Types of inflation

Understanding inflation and its types

Inflation can be divided into 3 types, namely based on the severity, causes, and sources. Following is the full explanation:

1. Types of inflation based on severity

Based on the severity, inflation is divided into 4 namely:

  • Mild inflation, which is inflation that is easy to control and has not disrupted a country’s economy. An increase in prices of goods / services in general, which is under 10% per year and can be controlled.
  • Moderate Inflation, which is inflation that can reduce the level of welfare of the middle-term fixed population, but not yet endanger the economic activities of a country. This inflation is in the range of 10% – 30% per year.
  • Heavy inflation, i.e. inflation that causes economic chaos in a country. In this condition, people generally prefer to save goods and do not want to save because the interest is much lower than the value of inflation. This inflation is in the range of 30% – 100% per year.
  • Very heavy inflation ( hyperinflation ), which is inflation that has messed up a country’s economy and is very difficult to control even though monetary and fiscal policies are carried out. This inflation is in the range of 100% and above per year.

2. Types of inflation based on the cause

Based on the cause, inflation can be divided into 2, namely:

  • Demand pull inflation , namely inflation that occurs because the demand for goods / services is higher than can be met by producers.
  • Cost push inflation , namely inflation that occurs due to an increase in production costs so that the price of goods supply rises.
  • Bottle neck inflation , which is mixed inflation caused by supply or demand factors.

3. Types of Inflation Based on the Source

Based on the source, inflation can be divided into 2, namely:

  • Domestic inflation , namely inflation sourced from within the country. This inflation occurs because the amount of money in the community is more than needed. This type of inflation can also occur when certain quantities of goods / services decrease while demand remains constant so prices rise.
  • Imported inflation, namely inflation sourced from abroad. This inflation occurs in countries that do free trade where there is an increase in prices abroad. For example, Indonesia imports capital goods from other countries. It turned out that the price of capital goods in the country rose, the price increase affected Indonesia, causing inflation.

Impact of Inflation

Understanding inflation and its effects

Referring to the definition of inflation above, this economic condition has positive and negative impacts for a country. The following are some of the effects of inflation in general:

1. Impact of Inflation on Revenue

Inflation can have positive and negative impacts on people’s income. In certain conditions, such as soft inflation, it will encourage entrepreneurs to expand production so as to improve the economy.

However, inflation will have a negative impact on those with fixed income because the value of money is fixed while the price of goods / services rises.

2. Impact of Inflation on Exports

The ability of a country’s exports will be reduced when experiencing inflation, because export costs will be more expensive. In addition, the competitiveness of exported goods also experienced a decline, which in turn earned income from foreign exchange.

3. Impact of Inflation Against Savings Interest

As mentioned in the definition of inflation above, in an inflationary condition the interest in saving most people will decrease. The reason is because the income from interest on savings is much smaller while savers have to pay administrative costs for their savings.

4. Impact of Inflation Against Cost Calculation

Inflation conditions will make the calculation of cost of goods subject to be difficult because it can be too small or too big. The percentage of inflation that occurs in the future often cannot be accurately predicted.

This will then make the process of determining the base price and selling price become inaccurate. Under certain conditions, inflation will make it difficult for producers and cause economic chaos.

Inflation Theory

There are three theories of inflation that are used to answer various questions why inflation occurs, namely:

1. Quantity Terror

As mentioned in the notion of inflation above, the more money in circulation the prices will rise.

2. Keynes’s Theory

According to Keynes’s theory, inflation can occur when a group of people wants to live beyond the limits of its economic capacity by buying goods and services in excess. According to economic law, the more demand while the supply remains, then prices will rise.

3. Structural Theory

Inflation can also occur when producers cannot quickly anticipate an increase in demand due to population growth.

Thus a concise explanation of the notion of inflation, causes of inflation, types of inflation, impact and inflation theory. May be useful.

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