Inflation: Definition, Causes and The Impact

Jun 20, 2022
Ilustasi inflasi

Every year, every country in the world faces the phenomenon of inflation. This is sometimes unavoidable for several reasons. Unfortunately, many ordinary people do not know about inflation. Most people are confused about inflation which leaves them wondering. Starting from understanding what inflation is, what causes inflation, and what the inflation rate is like.

Therefore, it is good to have a look at the explanation given below. To find out more details about the complete inflation information.

What is Inflation?

As for those who don’t know what inflation is, inflation is an assessment process in seeing changes in prices that continue to increase. So inflation is influenced by continuous price increases in many ways. One price increase may not cause inflation. But some price increases could be the cause.

Therefore, it is necessary to check the inflation rate to see if there is inflation or not.

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How to Calculate The Inflation Rate?

Inflation (source: freepik).

Inflation (source: freepik).

To be able to know how to calculate the inflation rate, the steps are actually not difficult. It’s just that there are several price indexes that are important to know. The following are some methods for calculating the general inflation rate:

Calculate the Consumer Price Index

This is the most common way to calculate the inflation rate. The step is to calculate the average price of goods that have been purchased by consumers. So you can know what the inflation rate is.

GDP deflator

This is a way of looking at changes in the price of a particular good. For example, the price of domestically produced goods, the price of new goods, the price of finished goods, and the price of services.

Using the Manufacturing Price Index

This is a way of calculating the inflation rate by calculating the price that manufacturers need to produce goods. For example, calculating the price of raw materials and the amount of workers’ wages.

Using the Commodity Price Index

This is a way of calculating the price of a certain item according to a predetermined price.

Calculate Cost of Living Index

This is done by calculating the daily cost of living for the community to be able to measure the average cost of living needed.

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Causes of Inflation

Inflation can occur for several reasons. If people ask what causes inflation, it can be influenced by several factors. As listed below.

  • • The first cause could be due to unstable money circulation. This in turn triggers inflation. Especially if there is too much money in circulation.
  • • High demand for goods can also be the cause of inflation. When demand is high but there are few available items, the price will automatically go up.
  • • The next cause is due to the decline in currency exchange rates. This decline in the currency exchange rate can trigger inflation in a country.

Types of Inflation

There are several types of inflation in general. This can be seen from the calculated inflation rate. So it can be known what kind of inflation is happening. The types of inflation are as follows:.

  • Mild inflation, meaning less than 10% price increase in a year.
  • Moderate inflation, is a condition where there is an increase in prices of about 10% to 30% in one year.
  • Heavy inflation, which is an increase in the prices of goods at least 30% and can even reach a value of 100% increase in one year.
  • Hyperinflation, where most goods increase by more than 100% in just one year.

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Inflation Impact

Inflation (source: freepik).

Inflation (source: freepik).

Of course, there are several impacts of inflation that occur, especially in the economic sector of the community. First, this inflation can create a decrease in the value of the currency. So if previously you had enough money to finance many things, inflation will reduce that ability. Only fewer items can be acquired for the same amount of money.

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How to Overcome Inflation

By looking at the consequences, it is not surprising that many governments in the world are trying to suppress the inflation rate. On the other hand, various efforts were also made as a way to overcome inflation. Here’s how to overcome the inflation rate that occurs:.

Determine the monetary policy carried out by the government

In this case, the government plays an important role in controlling the situation and inflation rate. So that there is a need for intervention in the form of setting monetary policy to maintain the country’s financial stability.

• Increase taxes on various things

So it can reduce the use of money. Although sometimes this is not the most effective solution.

This is an explanation of inflation, from its understanding to its causes. The explanation above can at least provide knowledge about the inflation mechanism in general. So that if it occurs in an area, the community and the government can jointly look for ways to optimally overcome the inflation problem.