Definition of Deflation: Types, Examples, Causes and How to Overcome It

Definition of Deflation Types, Examples, Causes and How to Overcome It – Deflation is a term that exists in the world of the economy. Deflation is a condition in which a country will get an advantage but also get a loss. These losses will continue to occur if deflation is increasingly out of control.

What is deflation? This article will discuss the definition of deflation, types of deflation, examples of deflation, ways to overcome it, positive and negative impacts and causes of deflation.

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Definition of Deflation

Definition of Deflation Types, Examples, Causes and How to Overcome It

What is deflation? Deflation is a familiar word in economics. However, for those who are not involved in economics, this term may be foreign to them.

Deflation is a condition when the price of goods in a country decreases. The decline in the price of these goods can occur periodically, directly or simultaneously. This of course has an impact on the economy.

At first glance, this would probably benefit a lot of people. People who like shopping can immediately shop in large quantities. When this happens, generally people will immediately spend a lot of things that are needed by these people.

At the same time, deflation that occurs in a country will have a greater impact on business owners. All business owners will feel the impact. Both goods and service business owners.

The company will continue to be harmed as a result of these transaction activities. The result will make entrepreneurs have to rack their brains. Usually entrepreneurs will work around this by reducing costs in producing goods.

In addition, the company is also likely to reduce employees. Layoffs or termination of employment from the company to its employees can be a fairly reasonable choice. This happened because there were some company owners who did not want to reduce their production costs in the low-cost sector.

Like the use of cheaper raw materials. When a company takes layoffs, the company will consider its customers. The company does not want to take the risk of product changes that will interfere with consumer comfort.

In the KBBI or Big Indonesian Dictionary, deflation is an increase in the value of a currency, among other things, by a reduction in the number of banknotes already in circulation. The goal is to restore the purchasing power of money whose value has decreased.

In addition, according to the KBBI, deflation is an economic symptom that is the result of these conditions, such as a decline in production, scarcity of jobs and low purchasing power of the people.

An expert named Stacia E. H. Sitohang expressed his opinion on deflation. According to him, deflation is the opposite of inflation. In general, the definition of deflation is the price of an item that has decreased.

From an economic point of view, deflation is neither a good nor a profitable thing. Deflation can cause chaos in the economy. Therefore, the state of deflation must be overcome immediately.

The goal is not to cause economic problems. If deflation is allowed to continue, it can disrupt the sustainable balance of the economy.

The opposite of deflation is inflation. Inflation is a condition where there is an increase in the prices of goods. The increase occurs continuously in a product or service. This inflation can occur at any given time.

A situation can be said to be inflationary if the increase in prices occurs widely. In addition, the increase will have an impact on the prices of other goods.

Types of Deflation

After knowing the definition of deflation, the next discussion is the types of deflation. In general, the types of deflation are divided into two parts. Consists of strategic deflation and circulation deflation.

The division of deflation by type can help the readers when understanding deflation further. In addition, in order to determine the cause of deflation. The explanation of the two types of deflation is as follows:

1. Strategic Deflation

Strategy deflation is deflation that arises as a result of a policy determination. The policy is about controlling the symptoms of excessive consumption. This condition is believed to be able to suppress the increase in the price of products on the market.

The policies carried out by the government were not able to suppress excessive consumption in the community. As a result, it will lead to a decrease in prices. The decline in prices actually increased the consumption of the people.

One of the causes of strategic deflation is because there are policies issued by the government. In addition, the policies issued by the Central Bank are also one of the causes of deflation. Many countries experienced deflation as a result of the policies of their Central Banks that regulate the economy in that country.

These policies are policies that can lower interest rates. This will make it easier for consumers to get loans from banks. It will also allow producers to compete to deviate from the money they have in the bank. While straying money, they will expect to get a large interest.

However, it will make the circulation of money becomes scarce. After that, the price will decrease. Then the country’s economic condition will not be stable. Deflation that continues to occur will paralyze activity. Especially in the industrial and manufacturing sectors.

2. Circulation Deflation

The next type of deflation is circular deflation. This deflation can be caused by unstable conditions in an economy. This deflation will take place in the transition from a stable economic condition to a declining economy.

That would make the situation unsettling. Circulation deflation will arise because consumption and production power in the country do not show a balance. This will cause product prices to decrease.

The decline in prices occurred in the market during an economic recession. This condition begins with a significant decrease in the needs of the community by economic goods which can cause prices to drop drastically.

One thing that can cause this to happen is because the production of the same goods in sufficient quantities is excessive. For example, as happened in 2008. Many countries that produce crude oil in excess. This causes the price of oil to drop drastically.

It can’t even be controlled. This then caused many countries to experience deflation due to the oil.

Deflation Example

Examples of deflation are as follows:

1. The expansion of the world industrial revolution

At the end of the 29th century, a lot of technology emerged. Technology is emerging in various industries. The goal is to increase production.

This makes them compete to produce goods. They even produce goods in excessive quantities. It then made a big impact.

At that time, the supply of goods increased significantly. Then the price of goods decreases. This is what causes deflation to occur globally.

2. The decline in prices of food and seasoning commodities in Indonesia

At the end of 2019, the Central Statistics Agency noted that Indonesia experienced deflation. Deflation that occurred was around 0.27% in September 2019. This happened because most of the food and seasoning commodities such as red chili, cayenne pepper, eggs and chicken experienced a decline in prices. It was noted that there were 82 cities that experienced similar conditions in Indonesia.

3. Falling commodity prices in Romania

In 2008, precisely after the overall or global financial crisis, European countries apparently experienced quite severe deflation. One of the countries in Europe that received the greatest impact from deflation was Romania. Whereas generally Romania has stable economic conditions usually.

Deflation experienced by Romania in 2016 even reached around 3.6%. The main cause of deflation was due to the abundant production of crude oil at that time.

Many countries are competing to produce crude oil. The oil can be processed into fuel for industrial purposes. Excessive oil production will actually make crude oil prices plummet. In addition, it will have an impact on commodity prices in Romania which also plummeted.

4. Deflation in Cyprus

It seems that European countries are experiencing the effects of deflation. This happened because of the drop in world oil prices in Cyprus. The rise in deflation that occurred in 2015 in Cyprus even reached around 3.4% and was 0.4% lower than in Romania. However, it still has a big impact.

Cyprus, which relies on the country’s economy in the oil and gas industry, sea logistics transportation, and tourism, must experience difficulties.

5. Deflation in Greece

Apart from Cyprus, one of the European countries that felt the impact of deflation in their country was Greece. This country which is popular with the stories of its gods and goddesses must accept the effects of deflation.

In 2008, Greece had experienced deflation. Then Greece again experienced a financial crisis in 2015. The figure shows about 2.9% experienced by this country.

Causes of Deflation

Deflation certainly does not come alone without a reason. There are things that trigger deflation. What are the causes of deflation? The causes of deflation are as follows:

1. The number of results of similar products

In increasing competition, generally companies will compete to increase the production of similar products. Products or services produced will be made in such a way to win the hearts of consumers. In this case, companies will go down the path of keeping prices low. This is done in order to win the competition between companies.

2. Demand for production decreases

There are many products produced by companies that are not accompanied by the calculation of the right amount of production. Companies can produce goods that are tailored to consumer demand to work around this.

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3. The amount of money in circulation decreases

A decrease in the money supply can apparently lead to deflation. This is because there are many people who compete with each other to get high interest deposits from banks. People will certainly save their money in the bank equally. This will reduce the circulation of money and even become scarce.

4. The supply of goods offered has increased

Demand for the amount that occurs in the market will cause the production of goods to increase. although sometimes the facts show the opposite situation. Calculations and proper orientation will also lead to deflation.

Producers will no longer think about the amount of demand for these goods. Demand from the public will decrease for a product. As a result, companies will rack their brains to figure out how to spend the products made by them.

How to Overcome Deflation

1. Implementing monetary policy

Central banks often carry out monetary policy. This was done in order to increase the amount of money circulating in the community. Through this monetary policy, a policy called discount politics will apply.

Discount policy is a policy issued by the central bank. This policy is carried out to reduce or even increase the amount of money in circulation. You do this by lowering or increasing bank interest rates.

This is a step taken to lower the existing interest rate. Therefore, people will immediately withdraw the money deposited in the bank.

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2. Implementing fiscal policy

The next way to overcome deflation is to implement fiscal policy. The government has a role to determine the appropriate fiscal policy. It is used in order to regulate the economic conditions of a country in a better direction. The trick is to update existing expenses and receipts.

3. Implement non-monetary policies

The non-meter policy was also cited as an effective way of dealing with deflation. In a non-monetary policy, there will be several important steps. This step will increase the amount of money circulating in the community.

4. Lowering interest rates

One way that can be done to overcome deflation is to lower interest rates. Through this, the amount of money in circulation will increase in society.

People will certainly choose to hold back their own money, rather than saving it in the bank. Through the existence of a lot of money circulation in a society, it is expected to increase the number of purchases of goods so that deflation can be overcome.

Positive and negative impacts of Deflation

The following are the positive and negative impacts of deflation:

1. Positive impact

The positive impacts of deflation are as follows:

  1. The value of the currency will strengthen
  2. Public awareness will arise about the importance of saving to meet future needs.
  3. People can save more on shopping.

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2. Negative Impact

The negative impacts of deflation are as follows:

a. Business sector revenue decreased

The state of deflation that occurs in a country will cause many business people to compete. They will press the selling price. The goal is to attract consumer interest.

This will result in a decline in business profits. Then if the situation continues, it will force the business to stop its activities. The reason is because there is no production cost.

b. Layoffs increase

From the definition of deflation and its causes, it has been said that there will be an increase in the yield of a product. However, this was not accompanied by an increase in demand from the public. A company that suffers losses due to low profits will decide to do layoffs on a large scale on its employees. This is done to reduce the expenditure of salaries for each worker.

c. Stock and investment prices are falling

When a business continues to suffer losses due to deflation, investors will naturally withdraw their capital. They worry that they will not benefit from their business. That is the reason investors withdraw their capital. This is certainly not very good for the continuity of a business.

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