What is Inflation and Deflation and their Examples and Causes

What is Inflation and Deflation and Examples and Causes – In the field of economy, the meaning of inflation and deflation is a general thing that must be understood.

If you are a business person, these two phenomena will help in determining the quantity of your goods production.

Whether it’s increased or decreased, an understanding of inflation and deflation can further help you make decisions, especially when you understand what causes and how to deal with these two phenomena.

What is Inflation and Deflation

Starting from the definition of inflation and deflation, you should know what the general description of each of these phenomena is. The following is an understanding of inflation and deflation in general and according to experts.

1. Understanding Inflation in General

Inflation is a phenomenon of an increase in the price of goods that occurs continuously over a long period of time. The increase in prices does not occur in one item, but in many products. This is based on an increase in the ratio of the amount of money to be paid.

That is, the more money circulating at that time, inflation can occur because the prices of goods also increase.

2. Definition of Inflation According to Experts

Parkin and Bade argue that inflation is an event of an increase in the nominal money that can be paid by the public in a certain period. This phenomenon is called the ratio of money in getting goods.

Nopirin stated that inflation is an increase in the price of goods in a certain period and continues. This phenomenon occurs because the financial capacity of the community is strengthened in obtaining products or goods.

3. Definition of Deflation in General

Deflation is a decrease in the price of goods that occurs in a certain period of time and lasts for a long time. In short, deflation is the opposite of inflation. If the price increases in inflation, then in deflation there is a decrease in prices.

In the event of deflation, prices will not only fall, but also events related to other financial sectors will also decrease, such as employee salaries, production costs, as well as people’s purchasing power.

During deflation, it is difficult for producers and consumers to make a profit except by lowering the price of their products. Because even at low prices, people’s financial ratios are also low, so goods cannot be purchased.

4. Definition of Deflation According to Experts

Stacia E. H. Sitohang stated that deflation is the opposite of inflation, namely a decline in prices, where deflation can also be called disinflation.

While quoted from Wikipedia, deflation exists because the money circulating in the community is quite low, so the company must lower the price of the product so that it can be adjusted to purchasing power.

From the explanation above, it can be concluded that the meaning of inflation and deflation are basically opposite phenomena, where inflation is an increase in the price of goods due to an increase in the money ratio, while price deflation decreases because the money ratio is also low.

If this phenomenon lasts for a long period of time, then the economic cycle will be sluggish because many products will be withdrawn and can even cause a company to go out of business.

Causes of Inflation

After understanding what inflation and deflation are, you must also know the reasons why inflation and deflation occur. Some of the factors that can cause inflation are as follows.

1. Money Supply

The excess supply of currency is one of the factors that causes inflation. The amount of money in circulation or circulation in a country grows through economic growth so that the value of the currency decreases.

In the age of technology, countries are moving away from the traditional method of valuing money by investing the amount of gold they own. This method is determined by the amount of currency in circulation and is accompanied by the public’s perception of the value of the currency.

2. National Debt

Another factor that causes inflation is the national debt, which includes loans and state spending. If a country’s debt increases, the country can take two options, including the following.

  • Taxes increased internally
  • Extra money printed to pay off debt

3. Demand-Pull Effect

Demand-pull means that when the economy grows as wages increase in an economy, people will have more money to spend on goods and/or services.

This increase in demand for goods and services causes companies to increase the prices borne by buyers so that supply and demand remain balanced.

4. Cost-Push Effect

Cost-push states that companies that are facing rising input costs for raw materials and wages to produce consumer goods will hold back on profitability by giving the final consumer an increase in production costs in the form of price increases.

5. Exchange Rate

Exposure to foreign markets generally functions based on dollar values, where the global economy of trade will play exchange rates as an important factor in determining the rate of inflation itself.

Knowing the meaning of inflation and deflation means that you also have to know the causes of why these two phenomena occur. After the causes of inflation, you can also listen to the causes of deflation below.

Causes of Deflation

Deflation can also be caused by a number of factors, including the following.

1. Structural Changes in the Capital Market

When different companies selling similar or similar goods or services compete with each other, there will be a tendency to lower prices in order to gain an advantage in the competitive process.

2. Productivity Improvement

Innovation and technology provide opportunities to increase production efficiency which leads to lower prices of goods and services. Some innovations even affect certain productivity and impact the entire economy.

3. Declining Currency Supply

Similar to the cause of inflation, the declining supply of currency will lower the prices of goods and services so that they can still be reached by the public.

Impacts Caused by Inflation

It is not enough to understand what inflation and deflation are and the causes that make these two phenomena happen. You also have to know that if there is a cause, there must be an effect or impact.

The impact of inflation can enrich your knowledge after a deeper understanding of what inflation and deflation are. The impact of inflation generally causes people’s purchasing power to decrease.

This was caused by rising prices of goods. If inflation occurs at a high level, it will have an impact on public opinion which will continue to decline as well, which can cause people’s living standards to decrease.

However, inflation at a low or mild level with an increase of 2%-3% can have a positive impact, where rising wages and corporate profitability are one impact, and capital flows can be maintained in a growing economy.

The Impact of Deflation

Unlike inflation, deflation itself has an impact on increasing the number of job cuts (PHK) due to falling prices of goods, which will increase the number of unemployed and the minimum wage will also decrease.

In addition, deflation, which causes people’s purchasing power to decline and producers to become debtors in difficult situations, can create bad loans to banks or other financial institutions due to the lack of producer opinions.

How to Overcome Inflation and Deflation

It is still not enough to capitalize on the notion of inflation and deflation. If these two phenomena occur, government agencies or parties must immediately seek and find solutions so that inflation and deflation can be reduced and avoided.

Policies that can be applied to overcome inflation and deflation include the following.

  • Contractive monetary policy, also known as monetary policy, can be used to reduce the amount of currency in circulation and overcome inflation.
  • Expansive monetary policy is a policy to increase the money supply, where this policy can overcome deflation and increase people’s purchasing power and reduce unemployment.
  • Contractive fiscal policy, where this policy aims to reduce economic output.
  • Expansive fiscal policy, where this policy aims to improve the economy.

In this way, it is hoped that this article will be able to make you understand what inflation and deflation are and the causes, impacts, and even how to overcome them, so that in the future you do not experience excessive worry.

These two phenomena are indeed difficult to avoid, which will always exist and occur in the realm of business and the country’s economy. However, by understanding what inflation and deflation are and their causes, you can be prepared with other strategies if these two things happen.

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