Sunday, December 24, 2017

6 Causes of Inflation in a Country

In everyday activities, we often hear the term inflation. When it comes to inflation, the first thing that comes to mind is the rising prices of goods. Then, what is the meaning of inflation and what are the causes of inflation? Here's an explanation.

Understanding inflation
Inflation is an economic condition in which the prices of goods generally go up continuously over a period of time. The increase in the price of goods is classified in general because most of the price of goods, especially the main commodity price increases but there is still a small part that did not experience price increases or even experienced a fall in prices.

In addition, inflation also has a feature of continuous price increases. If the price increase only occurs at certain times such as Eid, Christmas, New Year, or before the election can not be categorized as inflation. An increase in the price of goods or inflation can be caused by several factors. The following are some factors causing inflation.

Causes of inflation
There are several factors that cause inflation, among others, the decline in currency exchange rates, high demand for goods, the increase of money in circulation, and so forth.

1. Inflation due to demand (Demand Pull inflation)

Demand Pull Inflation or infalsi due to demand is due to strong demand or public appeal of a good. Pull demand inflation is also known as Philips Curve Inflation. In general, this inflation is due to supply and demand for services or goods in the country for the long term that the community needs in large numbers.

In general, this inflation often occurs in the economy of the country that has a rapid growth. High employment opportunities in the country lead to high levels of people's incomes. It is an expense that exceeds the production capability of a service or goods. This excessive purchasing power of the people then causes inflation.

In Indonesia, demand withdrawal inflation may occur due to the demand for goods or services that are relatively high compared to their availability. In the macro-economic sense, this type of inflation is described as aggregate demand that is greater than or exceeds the capacity of the economy.

2. Inflation due to the increase of money in circulation

The theory of inflation is caused by the increase of money in circulation put forward by the classical that states that there is a link between the amount of money in circulation and the prices. If the quantity of fixed goods but the amount of money in circulation more than doubled the price of goods becomes more expensive doubled.

The amount of money circulating in the community can increase if a country uses a deficit budget system. So to cover the budget shortfall, the state prints new money that causes prices to rise.

3. Inflation due to increased production costs (Cost push inflation)

The inflation of production cost increase or cost push inflation is caused by the incentive to increase production cost in certain time period continuously. In general, the inflation of the increase in production costs is due to the increasing pressure of production factor costs. Increase Cost of production factor is usually caused by several things:

• The fall in the exchange rate of domestic currency with foreign currency or depreciation. The increase in currency exchange rates also causes raw materials or goods from abroad to become more expensive.

• Inflation overseas, especially trading partner countries, causes goods and products from abroad is also increasingly expensive.

• The imbalance between the number of labor and the demand for production goods makes the government will raise the price of production. One way to increase the price of production is to increase the wages or salaries of employees and recruit new employees with a higher salary or wage offer. Such policies lead to increased production costs, so that the price of production goods also become increasing.

Inflation caused by rising production costs typically occurs in a country with growing economic growth or growing rapidly but with a fairly low unemployment rate. In a country like this, labor supply is limited but demand for a high production goods.

In addition, inflation due to supply shocks can also occur due to other factors such as natural disasters and so forth. But it can also happen because the government raises the price of a certain good.

4. Mixed inflation

Mixed inflation or mixed inflation occurs due to an increase in supply and demand. This happens because of an imbalance between supply and demand. When the demand for a good or service increases, then it causes the supply of goods and factors of production to fall. Meanwhile, substitutes or substitutions for such goods and services are limited or non-existent. This unbalanced state will cause the price of goods and services to rise. This type of inflation will be very difficult to overcome or control when an increase in supply of a good or service is higher or at least equivalent to demand.

5. Expected inflation

Expected inflation occurs as a result of the behavior of people who believe that the future economic conditions will be even better. Public expectations of future economic conditions may also lead to demand inflation or inflation in production costs. This type of inflation is difficult to detect because the incidence is not too significant.

6. Economic and political turmoil

The economic and political situation in a country also affects the inflation. When a country is in an unsafe condition, the prices of goods in that country tend to be expensive. This has also happened in Indonesia when there was political and economic turmoil in 1998. At that time, the inflation rate in Indonesia reached 70% when the normal inflation rate ranged from 3 to 4%.

The cause of inflation is divided into many factors and some of which also occur in Indonesia. In general, inflation is an economic event or phenomenon that can not be eliminated completely. Government efforts are usually limited to controlling or reducing inflation.