Inflation
Inflation is the tendency for the general price of goods and services to rise continuously, causing the currency to depreciate. According to the Central Statistics Agency (BPS), Indonesia’s inflation rate in 2023 was recorded at 2.61% year-on-year, the lowest in 20 years. The largest increase occurred in the food, beverage, and tobacco category, which reached 6.18%. Inflation is felt by the public when purchasing basic necessities each year. The most common cause of inflation is an imbalance between the availability of goods and money in circulation. Inflation also has a significant impact on Indonesian society, including rising prices for basic necessities, declining purchasing power, and other factors. Providing education about inflation to the public is crucial to managing finances wisely.
Inflation in a country is detrimental to society and consumers. The impacts of inflation are quite diverse, but broadly speaking, the following are the negative impacts of inflation in a country. First, it decreases purchasing power. Inflation reduces people’s purchasing power. For example, the prices of basic necessities like rice, LPG, cooking oil, and sugar continue to rise while people’s incomes remain stable. This makes it difficult for people, especially those with low incomes, to meet their daily needs. Second, production costs rise. Businesses are also affected by inflation because raw material prices rise. Producers are forced to incur higher additional costs. If production costs increase, the selling price of goods also increases, leading to continued inflation (cost-push inflation). Third, it affects the value of the currency. Continuous inflation causes the currency to weaken. For example, Rp 50,000, which used to buy basic necessities like rice, cooking oil, sugar, and chicken, now only covers a portion of those items.
Fourth, the burden on low-income communities. Low-income groups are most affected, as they struggle to afford goods due to continuously rising prices. Fifth, there are rising export costs. Inflation also affects export competitiveness. If production costs rise, the price of exported goods continues to rise, while the country’s foreign exchange reserves decline. Inflation not only has negative impacts but also has positive impacts on society, including: First, it encourages investment. When prices rise due to inflation, some consumers are encouraged to invest, not only for profit, but also to protect the value of their assets from being eroded by inflation. Second, there are benefits for producers. Producers will benefit if selling prices are higher than production costs, thus generating higher profits. Third, there is economic growth. Inflation encourages people to invest, thereby increasing productivity and driving economic growth.
Factors that can cause inflation in Indonesia include: First, money circulation and monetary policy. If the amount of money circulating in the community is high, people’s purchasing power increases while the value of the currency decreases. This means more money is needed to purchase the same goods. Furthermore, lowering interest rates will also increase the money circulation, which can trigger price increases. Second, there is a reduction in the number of goods on the market. If the availability of goods in the market decreases while demand remains high, prices will rise (demand-pull inflation). Third, the rupiah exchange rate. A weakening rupiah will have a significant impact on importers. This is because the value of the currency increases while the goods received remain unchanged. This will increase import costs. For example, the weakening of the rupiah against the US dollar increases the prices of soybeans and wheat, thus pushing up the prices of derivative products (such as tempeh, tofu, and bread).
Several measures the government can take to suppress the rate of inflation include: First, raising bank interest rates. By raising interest rates, people will be encouraged to save/keep their money in banks. This can reduce the amount of money in circulation. Second, increasing tax rates. Increasing tax rates can absorb excess cash in the community. Furthermore, this policy will also help increase state revenue, which can be used to finance development. Third, reducing imports. To maintain price stability and protect domestic production, the government must reduce the number of imported goods. This will ensure the availability of domestic goods and curb inflation. Fourth, selling government securities. The central bank will sell securities to the public. When people buy these securities, their money will be absorbed by banks, reducing the money supply. Fifth, financial education for the public. To help the public manage their finances wisely, the government needs to provide education about inflation and its impacts. This way, the public will not be surprised when faced with price increases.
Inflation is an overall increase in the prices of goods and services that has a significant impact on the Indonesian economy. Inflation can have negative impacts such as reduced purchasing power, increased production costs, and a depreciation of the currency. On the other hand, inflation can also have positive impacts, such as encouraging investment, increasing profits for producers, and supporting economic development.
Factors causing inflation include a high volume of money in circulation, a decrease in the supply of goods, and a weakening of the rupiah exchange rate. To address inflation, the government can implement monetary, fiscal, or trade policies. In addition, the public needs to improve their financial literacy to better manage price spikes. The public needs to understand that inflation is unavoidable, but its impact can be minimized through proper financial management. With synergy between government policies and public awareness, inflation can be controlled, thereby maintaining national economic stability and continuously improving public welfare.
By: Almayra Zahratunafiza
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