Definition, Causes, Types, and Impact of Inflation

Definition, Causes, Types, and Impact of Inflation | Actually, the discussion is not only understanding, causes, types, effects of inflation, but we will discuss is how to control inflation and theories of inflation. First we start with the definition of inflation. In general, the definition of inflation is an economic situation where prices generally rose in a long time. Temporary price increases as price increases during Eid is not regarded as inflation, because while after the Eid, prices could fall back. Inflation in general can occur because of the money supply more than needed. Inflation is an economic phenomenon that can never be eliminated completely. Attempts were made usually only to the extent of reducing and controlling it.Causes InflationInflation caused by rising demand and rising production costs. Further explanation of the causes of inflation are as follows.a. Inflation due to rising demand (Demand Pull Inflation)Such inflation occurs because of the increase in demand for some types of goods. In this case, the public demand increase in the aggregate (aggregate demand). Increased demand may occur due to an increase in government spending, increasing demand for the goods to be exported, and the increase in demand for goods for private needs. The increase in public demand (aggregate demand) has resulted in rising prices because the supply remains.b. Inflation because the cost of production (Cos Pull Inflation)Such inflation occurs because of the increase in production costs. The increase in production costs caused by rising prices for raw materials, such as the success of the trade unions in raising wages or because of the increase in fuel prices. The increase in production costs resulted in price rises and inflation there.c. Inflation as the money supply increasesThis theory was put forward by the classics that say that there is a relationship between the money supply and prices. When the amount of goods was fixed, while money supply has doubled the price will be doubled. The addition of the money supply may occur for example, if the government budget deficits put on the system. Budget shortfall covered by printing new money resulted in rising prices.Types of InflationTypes of inflation or inflation kinds can be distinguished based on the severity, source and cause.a. Types of Inflation Based on severityBased on the severity, inflation can be divided into mild, moderate, severe, and very severe.

    Mild inflation: mild inflation is inflation that is still not so disturbing state of the economy. Inflation can be easily controlled. Prices are rising in general, but has not created a crisis in the economy. Mild inflation is under 10% per year.
    Moderate inflation: inflation is not harmful to economic activity. But inflation can reduce the welfare of those fixed income. Inflation was ranged between 10% -30% per year.
    Severe inflation: inflation is already screwed up the economy. At this severe inflation, usually people tend to store goods. And in general, people thought better to save money, because interest on savings is lower than the rate of inflation. Inflation and weighing between 30% -100% per year.
    Very heavy inflation (hyperinflation): This type of inflation is already screwed up the economy and is hard to control despite the monetary policy and fiscal policy. Inflation is very heavy to be at 100% and above annually.
b. Types of Inflation by SourceBased on the source, inflation distinguished on inflation from overseas and inflation are sourced from within the country.

    Inflation is sourced from abroad: Inflation happens because there are price increases abroad. On free trade, many countries are interconnected in the trade. If one country to import goods on countries that have inflation, then automatically the price increases (inflation) will affect domestic prices, causing inflation. For example, Indonesia has been importing capital goods from other countries. If the country's capital goods prices rose, then it will also affect the increase in Indonesia, causing inflation.
    Inflation sourced from within the country: inflation from domestic sources may occur because the printing of new money by the government or the implementation of the budget deficit. Inflation sourced from within the country can also occur due to crop failure. Crop failures led to bidding on a particular type of goods decreased, while demand remains, so that prices will rise.
c. Types of Inflation Based causeBased on the cause, inflation can be distinguished on inflation due to rising demand and inflation because the cost of production

    Inflation due to rising demand: sometimes the increase in demand can not be met producer. Therefore, the prices tend to rise. This is in accordance with economic laws "if demand rises while the offer remains, then the price tends to rise.
    Inflation due to rising production costs: increase in production costs resulted in the bid price of goods rises, which can cause inflation.
Impact of Inflation and How to Control Inflationa. Impact of InflationInflation is not always bad for the economy. Controlled inflation could increase economic activity. Here are the consequences caused inflation to economic activities.

    Impact of Inflation on Income: Inflation can change people's income. Changes can be beneficial or detrimental. In some conditions (conditions soft inflation), inflation can encourage economic development. Inflation can encourage entrepreneurs to expand production. Thus, new employment opportunities will grow at the same time increasing one's income. However, for people who earn their keep inflation will cause a loss because of a fixed income if exchanged for goods and services will be less.
    Export Impact Against Inflation: In an inflationary environment, the competitiveness of export goods is reduced. Reduced competitiveness occurred because the price of export goods more expensive. Inflation can be difficult for exporters and the country. The state suffered losses because of the competitiveness of export goods is reduced, resulting in reduced sales amount. Foreign exchange earned also getting smaller.
    Impact Against Inflation Interest People for Saving: In times of inflation, real income savers reduced because the amount of interest received in fact reduced due to inflation. For example, in 2006 januria someone to deposit money into a bank in the form of deposits of one year. These deposits earn interest at, say, 15% per year. If the rate of inflation during January 2006-January 2007 was quite high, say 11%, then the revenue from money deposited stay 4%. Interest in people to save is reduced.
    Inflation impact on the calculation of Cost: The state of inflation causes the calculation to establish the base price can be too small or even too big. Therefore, the percentage of irregular inflation, we can not be sure what percentage of inflation for a certain period. As a result, the determination of cost price and the selling price is often imprecise. This inflationary environment can disrupt the economy, especially for manufacturers.
b. How to Control InflationThe inflation rate that is too high can harm the economy of a country. Therefore, inflation should immediately above. Actions that can be taken to tackle inflation could be monetary policy, fiscal policy or other policies.1. Monetary Policy

    Cash stock-setting policy: The central bank can adopt policies to reduce money in circulation by setting a supply of money in circulation by setting a supply of cash to banks. By requiring commercial banks can be distributed by commercial banks became slightly. By reducing the money supply, inflation can be suppressed.
    Discount policy: To tackle inflation, the central bank may apply the discount policy by increasing interest rates. The aim is that people are encouraged to save. Thus, the expected amount of money in circulation can be reduced so that the inflation rate can be reduced.
    Policy of open market operations: through this policy, the central bank can reduce the amount of money in circulation by selling securities, such as Government Securities (GS). The more the number of securities sold, the money supply will be reduced so as to reduce the rate of inflation.2. Fiscal PolicyFiscal policy is a step to affect government revenues and expenditures. The policy can affect the inflation rate. The policies are as follows.

    Save government spending: The government can reduce inflation by reducing spending, so demand for goods and services is reduced, which in turn can lower the price.
    Raise tax rates: To curb inflation, the government can raise tax rates. Rising tax rates for households and companies to reduce consumption levels. Reduction of consumption levels can reduce the demand for goods and services, so that the price may go down.3. Other Policies Outside Monetary Policy and Fiscal PolicyTo improve the impact caused inflation, the government implements monetary policy and fiscal policy. But in addition to monetary and fiscal policy, the government still has other ways. Ways in controlling inflation is as follows ..

    Increase production and increase the number of goods on the market: To increase production, the government can issue production. It can be done, for example, by giving a premium or subsidy for companies that can meet certain targets. In addition, to increase the number of goods in circulation, the government could also loosen the tap imports. For example, by lowering customs duties of imported goods.
    Set a maximum price for some types of goods: Pricing will rein in prices that exist so that inflation can be controlled. But the determination to be realistic. If the determination was not realistic, can occur resulting black market (black market).
Theories Cause InflationOften the question arises why the inflation that occurred. That question can be answered by arguing theories of inflation. There are three theories that discuss why inflation took place, namely the quantity theory, the theory of Keynes, and structural theory.

    Quantity Theory: As previously disclosed, the classic argued that the price level is determined by the amount of money in circulation. Prices will go up if no additional money in circulation. If the number of items offered fixed, while the amount of money plus doubled, then sooner or later the price will rise to two-fold.
    Theory Keynes: Keynes saw that inflation occurs due to excessive appetite of a community group that wants to take advantage of more goods and services available. Because of the desire to meet the needs excessively, the demand increases, while the offer remains, what will happen is the price is going up, the government can purchase goods and services by printing money, for example, inflation can also occur due to the success of entrepreneurs obtain credit. Credit earned is used to buy goods and services so that increases aggregate demand, while the aggregate supply remain. This condition results in rising prices.
    Structural Theory: This theory highlight the causes of inflation in terms of economic structure rigid. Manufacturers are not able to anticipate the rapid increase in demand caused by population growth. Demand difficult to meet when there is an increase in population.

"Pengertian, Penyebab, Jenis, dan Dampak Inflasi"