Inflation and its Relationship with Rising Goods Prices
Inflation and its Relationship with Rising Goods Prices In this article, I want to discuss an economic phenomenon that we all have experienced, namely the phenomenon of rising prices of goods in general, which is often referred to as inflation.
Yes, you can guess according to the title: I want to thoroughly examine a question that may have made you curious all this time: “Why do the prices of goods always go up every year? Why don't the prices drop every once in a while?" When I was still in high school, around the late 1990s (oh I know my parents) my pocket money was "only" IDR 5,000/day. Wow very little huh?.
But with that kind of money, I used to be able to pay for the bus fare to go to school, have lunch, and even have some left over for snacks after school. How come? Yes, when I was in high school, the public transportation fare was Rp. 500 once, then I ate rice and chicken soup in the school cafeteria for a minimum of Rp. 2,500.
It's really cheap if you look at it in 2022 now. Try to compare the prices of today's goods with those of a few years ago, in fact all the prices of goods around are also continuously rising! Just try to remember, starting from the price of fried foods, mineral water, to the price of comics in bookstores, they also go up every year! How come? The increase in the price of this item actually doesn't always happen in a yearly period, it could happen in a matter of months.
Try checking on the internet for fun, the price of cooking oil in February 2022 was approximately Rp. 13,000/liter, then in early March 2022 it rose again to Rp. 15,000/liter. Crazy, how come the price of cooking oil keeps going up? Why isn't the price the same? What are the traders playing with the price to get rich fast? Or perhaps, does this mean that the economic conditions in Indonesia continue to get worse from year to year?.
"Does the price increase indicate that the Indonesian economy continues to deteriorate?".
Price Increase Phenomenon Background The term in the economy where the price of goods generally increases is called inflation. If you look at economic textbooks in the inflation section, this phenomenon is explained as a process of increasing prices for goods and services in general or "depreciation of the value of (paper) money". But the explanations in the printed books are sometimes lacking in depth and still leave a question mark for everyone.
The simplest question that often pops up in my head is: How come the price increases for these goods are happening all at once? How come it can be compact? Why don't all sellers across the country agree to raise prices together? Actually it's not like that, because in principle, an economic situation where prices rise continuously is called inflation. And inflation is an economic phenomenon that occurs naturally due to changes in various components in the rotation of the economic wheel.
This phenomenon has not only occurred in the modern economy, but has occurred thousands of years ago and will continue to occur as long as the economic system is running. Then, what are the factors causing the price of goods to be expensive due to inflation and the decline in the value of money? Actually, from a macro perspective, the causes of inflation are very complicated, but in simple terms, I will try to explain the 2 main components that cause inflation, namely: Shifts in the supply-demand level The amount of money in circulation.
So, from the explanation above, it can be concluded that the cause of expensive goods prices is due to inflation and shifts in the demand and supply curves as well as the amount of money circulating in society. How do shifts in the supply-demand rate affect the inflation rate? Okay, I'll try to explain this phenomenon called inflation in a simple case: Haven't you noticed that every year, why is it that just before the holidays, the price of basic necessities in the goods market increases? Usually, before Eid al-Adha, the prices for goats and cows are higher. Why is it so? Yes, it is clear because ahead of Eid al-Adha, there is a lot of demand for mutton and beef. So the traders raised the price while many people wanted to buy. His name is also looking for profit. This is a very basic law of economics.
There is a lot of demand, the traders automatically increase the price to make more profits. But the day after Eid al-Adha, the prices for goats and cows must have dropped drastically! Why? Yes, for sure because people who want to buy (demand) for mutton and beef have also dropped drastically. This is a real illustration of the Law of Demand-Supply which affects the rise and fall of prices of goods. So, it is from the economic principle (demand-supply) that the phenomenon of inflation occurs. It's just that the scale is much wider than the phenomenon of the rise and fall of the price of sacrificial meat before Eid al-Adha or the price of fireworks before the new year.
How does the money supply affect the inflation rate? What if the amount of money circulating in society increases? What does this have to do with inflation? Let me try to draw a brief illustration: For example, you and your classmates are divided into 2 groups, namely buyers and sellers. Now half of you are the buying group and the other half are the selling group. Then the buyers all have Rp. 300,000/month and the sellers sell food, drinks and clothes.
Every day the buyers will definitely spend their money, they will buy food, drinks and clothes from the sellers. So, for example, on average, the buyer spends up to Rp. 10,000/day, in 30 days it runs out every month. So now, all of a sudden there is a teacher who is kind, adding money to the group of buyers for another Rp. 300,000, so now the buyer has Rp. 600,000, right?.
What will happen? Buyer groups may spend more than IDR 10,000/day, because now they have more money, maybe they will buy more food, drinks and clothes than before. Indeed, it has become one of human nature, that the greater the income, the greater the expenses tend to be. So what happens if everyone suddenly buys more? (read: increased demand) Remember the phenomenon of mutton & Eid al-Adha earlier, the business mind of traders will naturally increase prices!.
If this phenomenon continues, inflation will eventually occur. So we can sum up the scenario something like this: An increase in the money supply -> increase the level of consumption -> increase the level of consumer demand -> encourage sellers to increase prices -> inflation occurs This causal chain can actually be explained by the Quantity Theory of Money put forward by Irving Fisher, which is formulated in the following equation: \[M \times V = P \times T\] M = money supply V = speed of velocity of money (velocity) P = general price level T = number of transactions It seems from this equation that if M increases, assuming V and T are the same because the population size is also assumed to be unchanged, then P will also increase. This theoretical view is also known as the monetarist view.
Types of Inflation Based on the Causes Okay, now I hope you understand about the 2 basic components that affect inflation. Now, let's explore in more detail about the inflation phenomenon: An economist named John M. Keynes has the view that the causes of the inflation phenomenon can be divided into 2 types, namely Cost-push Inflation and Demand-pull Inflation. Cost-push Inflation Do you know that in February 2022 the price of pertalite fuel in the Riau Archipelago is IDR 8,000/liter! Why is it so expensive? In the West Indonesia region, especially in Java, the average price is IDR 7,650/liter.
Why can it be so different? Because
Before 2016, the government still had difficulty distributing fuel to eastern Indonesia due to limited infrastructure and transportation. As a result, the supply of fuel there is much less than the needs of the people. People who need a lot, but the supply of goods is small. In the end what? Yes, in order to be selected who deserves to get the goods, the price increases sky-high! In theory, economics lessons are often explained by D>S, excess demand, then P will rise. Well, a situation like this is known as Cost-push Inflation or Price Push Inflation. This type of inflation occurs due to scarcity of goods as a result of an uneven distribution process, or natural disasters, failed harvests, or difficulty getting raw materials so that the production process is disrupted.
Demand-pull Inflation If this type of inflation, the easiest example is like this, have you ever thought if your pocket money was bigger than what you get now. For example, your pocket money is now IDR 500,000 a month, suddenly Mama increases your allowance to IDR 1,000,000/month. Yes, naturally, you are usually compelled to spend more than when you have little pocket money.
Well, now imagine if this phenomenon occurs on a large scale in the wider community. Suddenly everyone is shopping! If demand goes up, again, can you guess for yourself how the traders will respond with their business minds? Yup, again increasing the price. Well, this causal chain is called Demand-pull Inflation. This type of inflation occurs due to excess demand in aggregate or as a whole (Aggregate Demand/AD) of a country. Why does the demand for goods and services increase as a whole? Usually the cause is excess liquidity or an increase in the amount of money circulating in the community.
Types of Inflation Based on Origin Okay, broadly speaking, you must understand more about the causes of the inflation phenomenon. But let's try to dig deeper into the causes of inflation. When looking at real economic phenomena, one cannot forget that the world has become more integrated, especially from an economic standpoint. It's very easy to see in everyday life. Check it out, where are all your gadgets made? household electronic equipment such as air conditioners, refrigerators, TVs, rice-cookers, etc. where are they made? Well, there are lots of products that are used that don't only involve the domestic industry, you know. This industrial relationship is not only at the level of consumer goods, but also at the level of raw materials, such as iron ore, tin, cotton, sugar, sand, wood, cement, etc.
From there it can be seen that the industrial climate outside will also have an impact on economic conditions in Indonesia, and vice versa. It is this economic relationship between countries that also allows inflation to occur. Inflation that occurs in other countries can also be "carried along" to Indonesia too, you know when shopping from other countries. Hence inflation can also be grouped based on its source, namely Imported Inflation and Domestic Inflation.
Imported Inflation This type of inflation can occur when a country purchases from a country that is experiencing high inflation, so that the goods in that country are high. So bring the high price to the domestic market. For example, the owner of an electronic equipment store, such as mobile phones or laptops, whose raw materials mostly come from China.
If China is experiencing high inflation, then the price of these goods from their country of origin will also be more expensive, right? Because importers in Indonesia get goods at a higher price than usual, what do they do when they are sold in Indonesia? Yes, the price will also be more expensive. This is what is called imported inflation, because inflation that actually occurs in other countries is brought into the country through trade relations.
Domestic Inflation Domestic inflation means within the country, what do you mean by that? This happened as a result of making inappropriate domestic economic policies. Later I will discuss inflation control through various policies issued by Bank Indonesia. So, if the policy is made at the wrong time, then inflation could occur. Apart from the wrong decisions made by Bank Indonesia, the government policy that ultimately pushed prices up was the tax policy. If you still remember about the State Revenue and Expenditure Budget (zenius.net content class XI K2013 about APBN and APBD).
Baca Juga
- Aplikasi Wpone Hilang dari Playstore, Apakah tidak ada Aplikasi Pengganti?
- Strategy ETF atau BITX dari Volatility Shares sebagai ETF kripto leverage pertama di AS
- Lonjakan mayoritas harga aset kripto
- Coinex Menyelesaikan Dengan Jaksa Agung NY, Membayar Denda $1,7 juta; Mengumumkan Keluar dari Pasar AS
- Tidak Bisa Withdraw! Member Aplikasi Wpone Diminta Top Up Rp 800 Ribu Agar Bisa WD, Penipuankah?
There it is discussed that one source of government revenue is through tax revenues that must be paid by individuals and also by companies operating in Indonesia. So, if the government sets taxes that are too low, while the state spending is high, then the state budget will end up in a deficit. If there is a deficit, the government will most likely have to cut its spending budget. If what is cut is the spending budget for infrastructure development, this has the potential to trigger inflation. Because ultimately the distribution of finished goods is disrupted due to a lack of infrastructure support. This kind of thing is called domestic inflation, because it is caused by factors that occur in the country.
Does Inflation Always Signal That Economic Conditions are Deteriorating?
after you know what components cause inflation, now the question is: “Is inflation bad? Does inflation always indicate that a country's economy is bad?” If you check the economic data of any country in the world, you will definitely find something called the inflation rate or rate. Even though what we are checking is the most developed and prosperous country in the world. Do all countries experience inflation? The answer is YES.
Inflation is indeed a very common phenomenon in macroeconomics, aka very reasonable. So the question now is, is inflation actually a positive thing or a negative thing? If you look at what has been discussed before, how come it seems negative? Who likes a price increase? If the prices of goods and services continue to rise, does that mean that the people also have to find more money to fulfill their daily needs? How come it doesn't sound like a good condition anyway?.
Do you still remember my story about my pocket money when I was in high school? From that story, it seems that the value of Rp. 5,000 in the 1990s was indeed much higher than Rp. 5,000 now. Even though the nominal value is the same as IDR 5,000. It means that it can be concluded that inflation makes the value of money decrease in price. This will obviously be detrimental if, for example, you save as much as you can in the piggy bank.
Because 10 years later, the money saved will be worth less than when you saved it. Now, let's take a look at the daily life of working people. For example, an employee at company A gets a salary of IDR 3,000,000/month. He has worked at company A for 8 years and his salary has always been that much. Can you imagine that 8 years ago, with Rp. 3,000,000, he could probably buy all sorts of things. But now the value of money is not as big as it used to be, because for the past 8 years there has been inflation.
Does this actually mean that his income is going down? The nominal doesn't go down, but the real value goes down right? This is what is said if inflation lowers a person's real income. That's why usually companies have a policy of increasing employee salaries every year, and this salary increase should also adjust to the inflation rate. So, back again, is inflation always detrimental to the economy? The answer: Not always detrimental. Why isn't it always bad? Because in reality, inflation also encourages economic growth.
How come? Let's see, for example, if there is inflation in Indonesia because the amount of money circulating in society increases as a result of the large amount of credit disbursed by the banks, surely people will buy more goods and services, right? As a result, demand in general or Aggregate Demand will increase, then inflation will occur. But on the other hand, this increase in public consumption will ultimately increase National Income or Gross Domestic Product/GDP (Gross Domestic Product/GDP), right? In another sense, inflation at a certain level is needed to drive the economy to move forward.
Remember, one way to calculate national income is to use the following equation: GDP=C+I+G+(X-M) C = consumption I = investment G = government spending X = export M = import.
How to Calculate Annual Inflation So, now that you know the components that cause inflation, I hope that this is enough to answer the question of why the price of goods consumed daily always goes up every year. Now the problem is, can the rate of increase be calculated or not? How big is the inflation rate? To what extent can inflation be said to be reasonable? How to measure it? Usually in every country there is a government agency that takes care of statistics. In Indonesia, they have the Central Bureau of Statistics (BPS).
Every month BPS publishes the percentage of Indonesian inflation and this figure is obtained from the results of data collection which are then processed further. What data is collected? In theory, there are several approaches used, in this article I will discuss the 2 most popular approaches, namely: the Consumer Price Index (CPI) and the Producer Price Index (PPI). What is the explanation of the 2 approaches above?.
Consumer Price Index (CPI) or Consumer Price Index (CPI) In essence, the CPI is an index based on the price paid by consumers to buy these goods and services. In Indonesia, the BPS team collects consumer price data, which is the aggregate price of goods and services consumed by the general public in Indonesia. Does that mean all goods and services purchased? Yes, no, you can shock them if you collect all data on the prices of goods and services consumed by people throughout the country, which number more than 240 million people.
So the BPS team determines a group of goods and services that are used as a reference for calculating inflation, covering between 225-462 goods and services grouped into several expenditure groups such as: food ingredients, prepared food, drinks, housing, water, electricity, gas and materials fuel, clothing, health, education, recreation and sports, transportation, communication, etc After taking this data from 82 regencies and cities in Indonesia, then the calculation based on the CPI is processed using the formula: So in practice, the CPI is the most commonly used to calculate the inflation rate by various countries around the world. Here, from the table below, you can see the results of calculating the inflation rate done by BPS.
Producer Price Index (IHP) or Producer Price Index (PPI) Apart from the CPI approach, there is also the PPI approach. Basically, these two approaches both want to calculate the estimated inflation rate. Only if the CPI looks at it from the price paid by consumers, if the PPI looks at the index from producer prices, namely the prices received by producers in selling their goods and services.
Like the CPI too, for the IHP the BPS team determines a group of goods and services in various sectors such as agriculture, mining and quarrying, and the processing, accommodation, food and beverage industries in 8 provinces in Indonesia, namely North Sumatra, West Sumatra, Riau, South Sumatra, Lampung, DKI Jakarta, West Java, Central Java, DI Yogyakarta, East Java, Banten, Bali, NTB, Central Kalimantan, South Kalimantan, North Sulawesi, South Sulawesi and Papua. In practice, the PPI approach is rarely used to calculate inflation. The reason is because it is more difficult to collect industry spending data, which certainly involves kitchen secrets from many companies.
So in practice this is more difficult to do compared to collecting CPI data.
What is the Reasonable Inflation Rate? Well, after you know the causes of inflation, the impact of inflation, and how to calculate it. Then the next question is: What is a reasonable inflation rate measure? To what extent can the inflation rate be said to be detrimental? As it is known that inflation can have a positive impact on certain measures, but it can also have a negative impact if it goes too far.
So how much inflation is actually harmful? So, here's the grouping of inflation based on severity.
If you have heard from your parents or siblings, in 1998 Indonesia experienced a monetary crisis marked by very high inflation. Based on the measurements above, in general, the 1998 Indonesian monetary crisis fell into the High Inflation category. It can already be said that this is really serious, especially when you touch hyperinflation. In theory, as much as possible the state financial control institution can control inflation to keep inflation at a low level.
Ways of Overcoming Inflation Okay, now you know that inflation can have a positive impact in certain doses, but it can be negative if you go too far. You also already know the classification of the dangers of inflation. Now the next question is: How do you control a country's inflation rate so it doesn't go too far? Of course, the government has a certain strategy to prevent excessive inflation. How do you take care of it? One of the state apparatuses is the central bank. In Indonesia, the central bank is known as Bank Indonesia.
Well, one of BI's tasks is to keep inflation at a reasonable level. How to do? The first is to determine the reference interest rate, which is also known as the BI Rate. In addition, there is also a policy to control the Money Supply (JUB). Maybe you are confused, what does the interest rate have to do with controlling inflation? So here's the explanation: There is 1 benchmark that is always the basis for economic actors (entrepreneurs, traders, investors, etc.) to make decisions. That benchmark is the interest rate. The interest rate referred to here includes many things, for example public savings interest, deposit interest, bank loan interest, etc.
Then how can the BI rate be able to control inflation so that it is not too high? Put simply, as soon as BI sees a high inflation rate, they will raise the BI Rate! Why is it even raised? The aim is for the public and investors to deposit their money into banks in various forms, it could be savings or time deposits, or other capital market instruments. Oh yeah, if the interest is high, it's more profitable if our money is put in the bank, it's safe and risk-free, the money keeps adding up automatically, there's no need to bother investing or running a business that has the risk of failing. But on the other hand, unknowingly it will also affect the money supply.
Because the smaller the money supply, the more inflation can be suppressed. Second, BI must control inflation, called Open Market Operations or Open Market Operations. The principle is the same, namely controlling the amount of money circulating in society. However, in order to minimize the amount of money in circulation, BI actively sells or purchases securities issued by Bank Indonesia, known as Bank Indonesia Certificates (SBI). SBI takes various forms, from securities (land), to share ownership, and so on.
The aim is to get economic actors interested in buying SBI so that the money supply decreases and it turns into a form of savings. The two methods above can actually be done to control deflation (the opposite of inflation).
If BI sees that deflation is getting worse, then BI will lower the BI rate and will buy securities. The goal is to increase the money supply.
On the other hand, if BI considers that the amount of money in circulation is too little, causing inflation to be too low, then BI will purchase SBI from the public. Another goal is for people to hold more money and increase their consumption, which in turn will encourage economic growth in Indonesia.
