Definition of Deflation
Deflation is a phenomenon of decreasing prices in a country. Deflation, according to the Big Indonesian Dictionary (KBBI), is an increase in currency value, among other things, by reducing the number of banknotes in circulation to restore the purchasing power of money whose value has decreased.
The decline in the price of goods during deflation can occur periodically, whether direct or equivalent. Deflation is the opposite of inflation, and inflation occurs because a large amount of money circulates in society, while deflation occurs because there is a shortage of money in circulation.
Deflation Type
Strategic Deflation
Strategic deflation occurs to reduce the symptoms of overconsumption due to rising market prices. Strategic deflation is deflation that occurs as a result of policies. This is because government policies have yet to be able to reduce public consumption. These policies impact reducing prices, not limiting excessive consumption by the public, and increasing public consumption. This policy makes it easier for consumers to obtain various types of credit from banks, allows producers to deposit their money in banks to obtain higher interest rates, and ensures money circulation and commodity prices lead to a decline. In general, strategic deflation occurs when commodity prices in the market do not remain uncertain, and the government needs to reduce the portion of public consumption to compensate. However, if this policy fails, it will cause commodity prices to fall, thereby causing public consumption to increase.
Circulation Deflation
Circulation deflation occurs when an economy transitions from success to recession. As a result, the balance between production and consumption capacity is disrupted, demand for surplus economic goods is insufficient, and market prices fall during recessions, causing circulation deflation to destabilize the economy. This condition usually occurs in conjunction with an economic slowdown during the transition period from a stable economy. Prices will fall significantly if the balance between production and consumption is lost. In addition, circulation deflation can also be caused by excess production of the same goods. Circulation deflation begins with a sharp decrease in society’s need for economic goods.
Causes of Deflation
Decrease in the amount of money circulating in society. As a result, they have decreased the public money supply. Because most people save their money in banks, the public money supply decreased, and deflation occurred.
Increase in the Supply of Goods When the demand for a product increases, the production of that product cannot be reduced. Under such circumstances, producers tend to continue to increase production, and if production continues without reducing the number of products sold to consumers, the demand for goods may decrease, the supply of goods may increase, and the price of these commodities will fall. They.
Reduced demand for goods. Even if you continue to produce, if consumers get bored quickly, demand will decrease if they become bored and indifferent. Consumers also prefer banks for the long term or to prepare for the future. So the demand for goods automatically fell sharply.
As a result of the slowdown in economic activity, many workers were laid off because their employers could not pay their salaries. As a result, people’s income decreases, and the amount of money circulating in society decreases.
As for investment, deflation has also discouraged investing in the real sector and stock exchanges. This prevents continued business activity and exacerbates economic downturns.
Deflation can bring interest rates down to 0% in a country. After that, interest rates on bank loans fell. This is indeed a mitigation measure to prevent people from saving their money in banks, which can reduce the circulation of money
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How to deal with deflation
Lowering Interest Rates
One way to overcome deflation is to cut interest rates. The goal is to increase the money circulating in society. In this way, people discourage saving at the bank, choosing to save their money at the bank, and the desire and desire to buy goods increases.
Implementation of monetary policy
In addition to the methods of implementing monetary policy described above, deflation can also be overcome. Monetary policy is a central bank policy that aims to increase the amount of money circulating in society. In addition, several ways can be applied discount policies, namely policies in the form of lowering current interest rates so that people can withdraw money from banks.
Implementation of tax policies
In deflation, money will not circulate in society. Lowering tax rates can increase the money supply. Lowering tax rates tends to increase public spending. This way, more money flows into society.
Implementation of the non-monetary policy This policy is very effective.
