In short, deflation is the occurrence of a large-scale decline in the price of goods in a short period of time. However, if you think about it again, there are several questions regarding what is deflation? What is deflation? And how to overcome deflation? We may be confused about answering it. Because actually, the terms deflation and inflation are terms in the economic world. Maybe you often hear the term deflation inflation from the news related to national economic development, without knowing the meaning of the word deflation and the meaning of deflation according to experts. If the condition experienced is like that, there is no need to worry. On this occasion, we will discuss what inflation and deflation are, as well as the factors that cause and types of them. We will not have much trouble knowing the meaning of deflationary inflation, because we have heard the terms both very often. In addition, the types and factors that cause inflation and deflation will also be explained. Come on, let's just look at the review below.
Definition of Deflation
Deflation is a condition in which the prices of goods decline massively and occur continuously in a very short time. It is different from the opponent, namely inflation. Inflation and deflation are two opposite things, to explain a country's economic condition that is happening. Meanwhile, inflation is a condition in which the prices of goods continue to rise massively. The meaning of inflation and deflation is very relevant when looking at the current condition of Indonesia, which is experiencing an economic crisis in the midst of a pandemic. In simple terms, we can conclude that deflation and inflation are the economic conditions of a country. The difference between inflation and deflation causes the economic condition of a country to become unstable and affects the condition of its own society. Therefore, it is very important for us to know the explanation related to what deflation and inflation are. If the explanation above is the meaning of the words inflation and deflation in a simple way, then what is the meaning of deflation according to experts? An expert who talks about deflation and inflation is Stacia E.H. Sitohang. According to him, deflation is a condition where the economy of a country is experiencing a decline in the price of goods in general and at the same time the value of the currency is also increasing. Simply put, deflation is a condition that is the opposite of inflation, which is a condition in which the price of goods rises while simultaneously decreasing the value of the currency. The deflationary gap is a condition triggered by inflation because the amount of money circulating in society is too much with a declining value. Related to this explanation, in addition to the term deflation, it is also known as rupiah deflation which is related to the increasing and decreasing value of the currency. Regarding the explanation of the meaning of deflation, perhaps some of us do not understand it clearly. Therefore, the explanation of inflation and deflation refers to economic conditions, to make it easier, we can learn about it from the types of deflation. Let's just look at what are the types and examples of deflation referred to below.
Types of Deflation
In the midst of the current Covid-19 pandemic conditions, the Indonesian economy is entering a period of crisis. Including inflation and deflationary conditions. Indonesia's deflation is inevitable, but it does not mean that it must be lamented. No matter how difficult the conditions are, they must be faced, in order to get out and return to normal economic conditions. Deflation has several types, to describe the condition of deflation itself. Because deflation is a condition in which the price of all goods decreases, there are several specific deflationary conditions according to the conditions that occur. There are two types of deflation, the first is Strategic Deflation, the second is Circulating Deflation. Below is a detailed explanation of the types of deflation:
1. Strategic Deflation
This type of deflation occurs due to the establishment of policies regarding the control of excessive consumption symptoms that occur at the grassroots (among the community). The consumptive nature of the community is considered to be able to suppress the increase in the cost of products in the market. Therefore, policies from the government are issued. The government's policy related to deflation is to suppress excessive consumption in the community which can result in a decrease in the price of goods, so that public consumption can increase without having to be excessive. People's purchasing power increases and avoids unnecessary consumptive nature. One example of a deflationary policy is a reduction in interest rates by the government through the central bank. The low interest rate can result in people as consumers to borrow money at banks. This condition can also make various companies as consumers race to save money in banks to earn large interest. From these conditions, in the end the money in circulation will become less and less and the price of goods will decrease. However, this type of deflation can have a negative impact, namely the instability of the country's economy for a fairly long time.
2. Circulating Deflation
In contrast to strategic deflation, the next type of deflation is circulating deflation. Deflation is a condition of declining prices of goods, while circulating deflation occurs during the transition period from economic success to declining economic conditions. In these conditions, the price of goods will automatically decrease by itself. In this condition, there will be an imbalance between production and consumption power so that market prices will experience a significant decline and decrease. In this condition, usually the government will immediately intervene by issuing policies. Either providing assistance directly, or in a policy that makes it easier for producers and consumers to carry out buying and selling transactions. Because deflation is a decrease in prices, in this case producers and consumers will suffer losses. An example of circulating deflation is what happened in 2008, when many countries overproduced crude oil. This has an impact on oil prices which have decreased drastically and of course cannot be controlled. Starting from that, many countries experienced deflation, including Indonesia. However, in order to better understand the condition of deflation is a decrease in prices, we can see it from other examples of cases that have occurred. One case example is not enough to make sense. Come on, let's immediately look at the various case examples below.
Examples of Deflation
In order to quickly understand and understand, using case examples is the right way. The following are some examples of deflation that has occurred:
1. Declining Prices of Food Commodities and Spices in Indonesia
The first example of inflation and deflation occurred not long ago in Indonesia. At the end of 2019, the Central Statistics Agency noted that Indonesia experienced deflation of 0.27%, in mid-September 2019. Deflation occurred due to a number of food commodities and spices experiencing a decrease in price. The food and spices are chicken, red chili, cayenne pepper and chicken eggs. The deflationary condition of food and spices commodity prices occurs almost evenly in Indonesia. More or less, there are around 82 cities/regencies in Indonesia that are experiencing deflation.
2. Commodity Prices Drop Drastically in Romania
This time we take the example of deflation that occurred in Romania, deflation occurred around 2008 when the financial crisis occurred globally. Countries in Europe experienced deflation quite severely. The impact of deflation is enormous in Romania. Even though Romania is a European country that has a stable economy. The deflation experienced by Romania even reached a figure of up to 3.6%. The cause of the deflation experienced was the abundant crude oil production at the time of deflation, namely in 2016. In fact, crude oil production is intended to be processed into fuel for industrial purposes. However, due to excessive production, it has an impact on commodity prices in Romania which have plummeted.
3. Japan's 30-Year Deflation Spiral
Although we are very confident that Japan is one of the Asian countries that has excellent economic and technological development, it turns out that Japan has been trapped in a deflationary spiral for 30 years. This has happened since 1989, when interest rates were raised by the Bank of Japan. Since then, Japan's economic growth has slowed down, and even stagnated and then declined. Since interest rates were raised, Japan has only been able to achieve economic growth of only 2%. This certainly has a bad impact, the productivity of workers in Japan has decreased, which can be seen in the country's economic growth.
4. The Impact of the World Industrial Revolution
Entering the 19th century, many technologies emerged that encouraged the industrial revolution in the world. This has a positive impact, namely the many various industries that compete to produce goods in large quantities. However, the production of goods in large quantities turned out to be excessive, which then became the cause of deflation. When the supply of manufactured goods increases massively, the price of goods actually shrinks and decreases in value. Global deflation is inevitable, especially in producing countries that have many industries. From some of the examples above, perhaps we have begun to picture what deflation looks like. And most importantly, it seems that we are beginning to understand what the main cause of deflation is. However, to be clearer, we can listen to the list of factors that cause deflation below.
Factors Causing Deflation
The factor or component that causes deflation is the large number of goods that are produced in excess as we can see in the examples of cases that have been explained earlier. However, it turns out that the cause of deflation is not only one, but there are several causes. The following are some of the factors that can trigger deflation:
- Decrease in the Amount of Money in Circulation
One of the causes of deflation is the decrease in the amount of money in circulation in society. This is due to the fact that many people are tempted by high bank interest rates, and are competing to save money in banks. So that the money in circulation is greatly reduced. This happened, of course, because the Central Bank made a policy to increase interest rates. Meanwhile, one of the monetary policies to suppress deflation is to lower interest rates. Not the other way around, but instead increase the interest rate itself.
- Increase in Excess Inventory
We can already see this causative factor in several examples of deflationary cases that have been explained in the previous section. Excessive production of goods can cause a decline in the price of goods and deflation is inevitable. So that there is no longer a number of requests for goods, and the circulation of goods will be difficult.
- Too Many Goods of the Same Production
It is not only the excessive production of goods that can be a factor causing inflation. Conditions when the number of goods of the same type and function are too many can also be a trigger for deflation. Increased competition is inevitable, one way to compete is to reduce the price of these goods. Although the impression of deflation tends to be bad, it does not mean that economic deflation does not have any positive impact at all. As the causes of inflation and deflation are different, so are the impacts of inflation and deflation. The next explanation will discuss the various impacts that occur due to deflation.
The Impact of Deflation
Because of the tendency of deflationary intentions which often cause negative impacts. First, we will discuss the various consequences of deflation that have a bad impact. That is:
- Potential for declining revenue from various companies
- Causing many layoffs (Termination of Employment) of employees and reduction of employee salaries
- Changes in consumer spending patterns
- Falling investments and stock prices
We can also see some of these impacts from the examples of deflation in several countries that have been discussed above. Next are some of the positive impacts of deflation, namely:
- It can make people (consumers) more frugal
- The value of the currency will strengthen even more
- People are encouraged to save for their own financial well-being
The positive impact of deflation is more about strengthening the nature and providing good habits to the community. If deflation in Indonesia occurs, hopefully it can strengthen the mentality and character of the Indonesian people so that they can encourage the realization of an even better Indonesian economy.
How to Overcome Deflation?
Because the influence of inflation and deflation on the economy is very significant and can be directly felt by people at the grassroots, therefore how to overcome deflation must be carried out immediately and really implemented. There are several stages and ways to overcome inflation and deflation, namely:
- Lowering interest rates. The goal is to increase the amount of money circulating in the community, so that people can save independently and buy their various wants and needs. Deflation can also be slowly overcome.
- Implement monetary policy. This policy can only be issued by the central bank with the same goal as the first point, which is to increase the amount of money in circulation in the public.
- Implement fiscal policy. The goal is still the same, to increase the amount of money circulating in the community.
- Implementing non-monetary policies. The purpose of this policy is still the same as the previous methods. Because basically, deflation will be overcome when the amount of money circulating in society is sufficient. And people can buy various needs without various considerations.
Hopefully the explanation of deflation is about price reduction, and also other explanations related to deflation that have been reviewed above can add to our understanding of various economic symptoms and conditions. That way, we can become more understanding and be able to handle it well when we experience it. Although deflation is a symptom of an economy that tends to be negative, it is not the end of our economic condition. We can participate in helping the country get out of deflation, by following the ways to overcome it as explained above. In essence, discipline and enthusiasm to rise are key factors that we must have in order to get out of even bad conditions. That was a review of the meaning of economic deflation and its types and impacts. Hopefully it can provide information about economic terms.
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