In the previous article, Investbro has already mentioned this. What is inflation? and how it affects the economy as a whole The article states that the inflation rate (In contrast to deflation) is a common phenomenon in the world of economics. Even if the public doesn’t like it. However, inflation must be controlled appropriately in order not to deteriorate the purchasing power of the people.

On the other hand, although people like it because it lowers prices, it also has to control deflation. even if it doesn’t happen Why is that? Check out the following comments:

definition of deflation

Deflation is when prices of goods decrease simultaneously over a period of time. Deflation is the opposite of inflation, where inflation is a simultaneous increase in the prices of goods over a period of time.

Deflation is also different from decay. in the destruction Prices of goods continue to increase. However, the rate of these price increases is lower than in previous years. For example, if in 2019 inflation reached 5%, in 2020 it will only reach 3%.

If it’s under control, deflation benefits people because it means they just spend less money to get the same amount of goods. Because the money that will enter the business sector or the government sector will also be less, so as well as the inflation rate. Deflation must also be properly regulated.

Example of deflation

in August 2022 Central Statistical Office (BPS) Deflation was recorded 0.21%. Especially the food, beverage and tobacco groups and the transportation group.

According to the BPS report, out of the 90 cities that the data was collected, 79 are experiencing deflation, while 11 are still experiencing inflation. The deepest deflation occurred in Tanjung Pinang, while the shallowest deflation occurred in Kediri and Depok.

Figure 1: Indonesia’s Deflation in 2022 (Source: BPS)

After adjusting in September 2022, Indonesia experienced another deflation in October 2022 with a value of 0.11% (B.P.S.Due to the drop in prices of foodstuffs such as eggs, chicken meat and other ingredients, Gunungsitoli was the city with the deepest deflation, while Sampit was the shallowest.

in the example above It can be seen that deflation can occur in a monthly context. Pseudonyms in August and October were deflationary. while September is not What if deflation occurs for 12 consecutive months or a year? Japan suffered chronic deflation in the late 1990s.

During 1995 – before the global financial crisis. Commodity price action in Japan continues to drop above 0 (deflation). There are several reasons for the prolonged decline in prices.

Firstly, there are low inflation expectations from both the Bank of Japan and the Japanese themselves. Secondly, there are problems with domestic supply and output problems. Third, there are other factors such as the exchange rate of the yen against other currencies that tend to rise (appreciate) and the growth of developing countries. Developed in the 1990s

The cause of deflation

1. Monetary policy

Monetary policy is a macroeconomic policy aimed at influencing the amount of money circulating in society. As mentioned in the previous article. One of the causes of inflation is the high amount of money in circulation in society. Deflation, on the other hand, is caused by the low amount of money in circulation.

One of the reasons for the decline in the money supply is the monetary policy of central bank in the form of using a high reference interest rate If the standard interest rate is high Many people with money save it in a bank and don’t use it for everyday necessities. As a result, the amount spent on transactions is reduced.

In the case of the protracted deflation from Japan above The researchers stated that other factors In terms of monetary policy that could lead to deflation, including central bank expectations of national economic conditions and the ability of monetary authorities to publicize their policies.

2. Decreased demand for manufacturing products

Marketed goods can be divided into several categories based on the relationship between these goods and consumer income. One of them is regular merchandise. Normal goods are goods or commodities whose demand will increase if the consumer’s income for these goods also increases.

On the other hand, if the income of consumers decreases Demand for these products will also decrease. normal goods will adapt to this condition by reducing the price of manufactured goods

An example is a broiler. When so many people are fired from their jobs that their income is reduced. People will switch from consuming chicken meat to other cheaper ingredients. As a result, the demand for chicken meat decreased. Because chicken meat is perishable. Broiler farmers therefore sell chicken meat at a lower price.

If the price drop was not only for chicken meat. But also with many other commodities, there will be deflation.

3. High supply

at the business level Deflation can be caused by the high supply of some commodities. As we all know, the price of a product will go up if the supply is limited but the demand is increasing. It is also used vice versa. If the supply of goods increases But the demand remains the same. The price of that product will be reduced.

An example is the price of rice during the main harvest season. During the harvest season, rice yield increases. In fact, the rice had to be sold immediately so it wouldn’t spoil, and the farmers had to spend money to start a new planting season. As a result, the price of rice decreases (deflation).

4. Pessimistic attitude towards the economy

Pessimistic attitudes towards a country’s economy can depress prices. People are reluctant to spend money because they are pessimistic about when the epidemic will end. As a result, companies have to reduce the price of manufactured products to adapt to economic conditions.

The impact of deflation

1. Reduced economic growth

Minimal amount of money circulating in the community People’s reluctance to spend As a result, the production and consumption sectors were sluggish. This will eventually result in a decline in the country’s economic growth. This can happen when deflation occurs not only in one sector and within a month, but in several sectors simultaneously and over a long period of time.

2. Increased unemployment

People’s reluctance to spend will also result in a decline in the company’s revenue. As a result, the company had to cut many parts of the cost. Including salary costs by laying off some employees.

in the macroeconomic arena Laying off a number of employees increases the number of unemployed. The increasing number of unemployed people can systematically affect the social conditions of society.

3. Decreased investment

The sluggish economy will discourage investors from investing. for foreign investors A sluggish economy won’t make them interested in investing in Indonesia. Because they think investing in this country is useless because no one buys it.

for domestic investors Deflation causes them to choose not to buy high-risk instruments such as company stocks. because in the end It is useless to buy stocks of the company. If the general public cannot buy the company’s production, then deflation will also allow them to save more money on assets considered safer and more important, such as cash or a safe haven.

How to overcome deflation

1. Market opening policy

One of the many ways to deal with deflation is to increase the money supply in society through open market policies. to do this The central bank, as a monetary authority, can lower benchmark interest rates and buy government bonds. (state bond)

Standard interest rates are lowered in hopes that many will dare to use bank loans for business needs or to purchase the goods they need. This interest rate reduction can be used by people borrowing money from banks to get lower interest rates. (especially those with floating interest rate).

State bond buybacks are aimed at increasing market liquidity. Monetary authorities will buy back government bonds that were previously sold to institutional investors. (including banks) with this buyback Hopefully banks won’t have to worry about cash reserves when expanding new loans or restructuring old ones to the public.

3. Fiscal Policy

Implement fiscal policy to reduce deflation by implementing various projects to increase people’s purchasing power. These programs vary, for example:

  1. Providing tax discounts for certain tax objects
  2. Subsidies for essential commodities such as fuel
  3. Direct cash assistance such as pre-employment cards and direct cash assistance (BLT) are slightly different from pre-employment cards. The provision of BLT can be done to overcome the effects of inflation.
  4. opening labor-intensive jobs to accommodate workers affected by layoffs Causing people to not be stressed because they lost their jobs and still have income
  5. Buy back government bonds issued by the Ministry of Finance Note that there are different types of bonds. that can be repurchased before the redemption date
  6. Direct help in the form of groceries and much more.

slightly different from monetary policy implementation fiscal policy It must be specific to the target groups that are most affected by deflation and inflation. For example, BLT provisions can be given to those affected by large layoffs. The goal is that they can still afford their everyday needs and not be stressed out.

Implementation of the open market operating policy (Monetary policy) and fiscal policy to deal with deflation must be formulated with prudence and precision. Because there is a possibility that the implementation of the above policies that are excessive or contradictory will cause society to sink into a deeper crisis.

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