Inflation is defined as an increase in the general price level. In other words, the price of goods and services such as housing, clothing, food, transportation, and fuel should increase so that inflation occurs in the economy as a whole. If the price is just some kind of goods or service increases, there is not always inflation. Inflation can be measured in several ways. Inflation is generally measured by “Gross Domestic Product Deflator (GDP Deflator).
Also called the indicator Consumer Price Index (CPI) GDP Deflator is the broad index of inflation in the economy. The CPI Index measures changes in the price level of various consumer products such as inflation causing factors. Read also Reasons why is Indonesia mixed economy
Causes of Inflation
Economists distinguish between two types of inflation: Demand-Pull Inflation and Cost-Push Inflation. Both types of inflation lead to an increase in the overall price level in an economy such as how to calculate the rate of inflation.
- Demand-pull inflation
Demand-pull inflation occurs when aggregate demand for goods and services in the economy increases faster than the economic productive capacity. One potential shock to aggregate demand may come from a central bank that rapidly increases the money supply. Increased money in the economy will increase demand for goods and services. In the short term, businesses can not significantly increase production and supply constant.
- Inflation drives costs
On the other hand, this occurs when the input price of the production process increases. Increased fast wages or rising raw material prices are a common cause of this type of inflation.
The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation.
The increase in energy prices causes the cost of production and transportation of goods to rise. Higher production costs lead to a decrease in aggregate supply and an increase in overall price levels.
While the above-mentioned inflation differentials may seem simple, the causes of changes in price levels observed in the real economy are often much more complex. In a dynamic economy, it is very difficult to isolate a single cause of price level changes such as inflation.
Factors Cause Inflation In Indonesia
If you want to know the reasons of inflation in indonesia, then here’s the explanation :
1. Increased Needs
If the economy is at or near full employment, then an increase in AD leads to an increase in the price level. When companies reach their full capacity, they respond by raising prices that lead to inflation.
Also, near jobs full of labor shortages, workers can earn higher wages that increase their purchasing power. We tend to get demand-pull inflation if economic growth is above the long-term growth trend level.
The trend rate of long-term economic growth is the average sustained growth rate and is determined by productivity growth as a result of inflation.
2. Inflation Cost Boost
If there is an increase in company costs, then the business will forward this to the consumer. There will be a shift in the smaller direction. Inflation drives costs can be caused by many factors. Read also Reasons why Indonesia is good for invesment
3. Increased wages
If trade unions can present a united front then they can bid for higher wages. Rising wages are a major cause of cost inflation because wages are the most significant cost for many companies. Higher wages may also contribute to increased demand.
4. Import prices
One third of all goods are imported in Indonesia. If there is a devaluation, then import prices will become more expensive which causes an increase in inflation.
Devaluation means Pound is worth less. Therefore we have to pay more to buy the same imported goods.
5. Prices of raw materials
The best example is the price of oil. If oil prices rise by 20% then this will have a significant impact on most of the goods in the economy and this will lead to cost-push inflation.
For example, in 1974 there was a spike in oil prices that caused a period of high inflation worldwide.
6. Increase in inflationary profit
When companies raise prices to get a higher rate of inflation. This is more likely to occur during strong economic growth. See also Reasons why Indonesia is the happiest country
7. Productivity decreases
If the company becomes less productive and allows increased costs, this always leads to higher prices. Decreasing production causes the goods to become scarce. The scarcity of goods leads to rising prices that cause inflation
8. Higher taxes
If the government imposes taxes, such as VAT and Excise, this will lead to higher prices. Therefore the CPI will increase. But this tax increase is likely to increase once. There is even an inflation measure that ignores the effect of a temporary increase or decrease in taxes.
9. Rising house prices
The rise in house prices does not directly lead to inflation. But they can cause a positive wealth effect and drive consumer-driven economic growth. This can indirectly lead to demand-pull inflation. You may read also Reasons why Indonesia is over populated
10. Print more money
If the Central Bank prints more money, you would expect to see an increase in inflation. This is because the money supply plays an important role in determining the price. If there is more money chasing the same amount of goods, then the price will rise. Hyperinflation is usually caused by an increase in the extraordinary money supply.
However, in exceptional circumstances, such as a trap of liquidity, it is possible to increase the money supply without causing inflation. This is because, in a recession, an increase in the money supply may only be stored, for example the bank does not increase the loan but only save more bank reserves.
11. Mixed Inflation
This inflation is due to an increase in demand and supply. The cause is none other than the imbalance between supply and demand. Conditions in which demand for an increase in goods will cause the availability of goods and factors of production decreased.
In other cases substitute goods or substitution of goods required is not available. This condition will certainly cause the price of goods or services to increase. This inflation tends to be very difficult to overcome and controlled increase or supply of goods higher or equivalent to demand. Read also Reasons why you should visit Indonesia
12. Inflation due to Structural Economic Reform
The cause of inflation is due to a rigid economic structure. This happens if the entrepreneur can not prevent rapidly rising demand due to population growth.
This condition will cause the price of goods needed to jump and stock on the market is not sufficient. Surely the condition will greatly affect the price of goods and demand
13. Expected Inflation