What is Deflation? Deflation is a term that exists in the world of economics. Deflation is a condition where the country will get an advantage but also get a loss. These losses continue to occur when deflation gets 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.
Definition of Deflation
What is deflation? Deflation is a familiar word in economics. However, for those who do not work in the economic field, this term may be foreign to him.
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.
When viewed at a glance, this will probably benefit many people. People who like to shop can immediately shop in large quantities. When this happens, generally people will immediately spend a lot of goods that are needed by these people.
At the same time, the deflation that occurs in a country will have a bigger impact on business owners. All business owners will feel the impact. Both goods and service business owners.
The company will continue to be disadvantaged as a result of the transaction activity. 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 made a somewhat reasonable choice. This happened because there were several 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 disrupt consumer comfort.
If viewed from an economic perspective, then deflation is not a good or profitable thing. Deflation can cause chaos in the economy. Therefore, the deflationary situation must be addressed immediately.
The goal is not to cause economic problems. If deflation is allowed to continue, it can disrupt the balance of a sustainable economy.
The opposite of deflation is inflation. Inflation is a condition where there is an increase in the prices of goods. This increase occurs continuously in a product or service. This inflation can occur at any given time.
A situation can be said to be inflation if the increase in prices occurs widely. In addition, the increase will affect 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 readers understand deflation further. In addition, in order to find out the causes of deflation. The explanation of the two types of deflation is as follows:
1. Strategic Deflation
Strategic deflation is deflation that arises as a result of a policy setting. The policy concerns controlling the symptoms of excessive consumption. Conditions like this are believed to be able to reduce the increase in the price of products on the market.
The policy carried out by the government was apparently unable to suppress excessive consumption in the community. As a result, it will lead to a decrease in prices. The price reduction actually further increases public consumption.
One of the causes of strategic deflation is due to policies issued by the government. In addition, policies issued by the Central Bank are also one of the causes of deflation. Lots of countries are experiencing deflation as a result of their Central Bank policies that regulate the economy in that country.
The policy is a policy that can reduce interest rates. This will make it easier for consumers to get loans from banks. It will also allow manufacturers to compete to save the money they have in the bank. While saving money, they will expect to earn huge interest.
However, that would make the circulation of money scarce. After that, the price will decrease. Then the country’s economic condition will not be stable. Continuous deflation 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 economic condition. 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 price reduction occurred in the market during an economic recession. This condition was preceded by a significant decrease in people’s needs for economic goods which could cause prices to drop drastically.
One of the things that can cause this to happen is because the production of the same goods in sufficiently excessive quantities. An example is what happened in 2008. Many countries produce excess crude oil. This caused the price of oil to drop drastically.
It’s even uncontrollable. This then caused many countries to experience deflation due to the oil.
Deflation Example
Examples of deflation are as follows:
1. 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. In fact they produce goods in excessive quantities. It then made a big impact.
At that time, the supply of goods became significantly increased. Then the price of goods becomes increasingly shrinking. This is what causes deflation to occur globally.
2. Decreasing prices of food and seasoning commodities in Indonesia
At the end of 2019, the Central Statistics Agency noted that Indonesia was experiencing deflation. Deflation occurred at around 0.27% in September 2019. This occurred because most food and seasoning commodities such as red chilies, bird’s eye chilies, eggs and chicken experienced a decrease in prices. It is noted that there are 82 cities experiencing similar conditions in Indonesia.
3. Drop in commodity prices in Romania
In 2008, to be precise after the overall or global financial crisis, European countries apparently experienced quite severe deflation. One of the countries in the European part that received a large impact from deflation is Romania. Even though in general Romania has a stable economic condition usually.
The deflation experienced by the Romanian state in 2016 even reached around 3.6%. The main cause of deflation was due to the abundance of crude oil production at that time.
Many countries are competing to produce crude oil. This oil can be processed into fuel for industrial purposes. Excessive oil production will actually make crude oil prices fall even more. In addition, it will have an impact on commodity prices in Romania which have also fallen.
4. Deflation in Cyprus
Apparently European countries experienced the effects of deflation. This happened because of the drop in world oil prices, namely Cyprus. The deflation rate that occurred in 2015 in Cyprus even reached around 3.4% and 0.4% lower than Romania. However, it still has a big impact.
Cyprus, which depends on the country’s economy on the oil and gas industry, maritime logistics and tourism, must experience difficulties.
5. Deflation in Greece
Apart from Cyprus, one of the European countries that has felt the effects of deflation in its country is Greece. This country which is famous for its tales of gods and goddesses must accept the effects of deflation.
In 2008, Greece experienced deflation. Then Greece again experienced a financial crisis in 2015. The figure shows around 2.9% experienced by this country.
Causes of Deflation
Deflation certainly does not come without 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 production of similar products. Products or services produced will be made in such a way as to win the hearts of consumers. In this case, the companies will take the path of keeping prices low. This was done in order to win the competition between companies.
2. Demand for production decreased
There are many products produced by companies that are not accompanied by an accurate calculation of the amount of production. Companies can produce goods according to consumer demand in getting around this.
3. The money supply decreases
A decrease in the amount of money in circulation can apparently lead to deflation. This is because there are many people competing with each other to get high interest on deposits from banks. The public will of course keep their money in the bank in the same way. 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. Correct calculations and orientations will also contribute to deflation.
Producers will no longer think about the number of requests for these goods. Demand from the community will decrease for a product. As a result, companies will rack their brains to find ways to spend on the products they make.
How to Overcome Deflation
1. Implement monetary policy
Central banks often carry out monetary policy. This was done in order to increase the amount of money circulating in society. Through this monetary policy, a policy called discount politics will apply.
Discount policy is a policy issued by the central bank. The policy was 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.
2. Implementing fiscal policy
The next way to overcome deflation is to apply 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 renew existing expenditures and receipts.
3. Implementing non-monetary policies
The non-meter policy is also referred to as an effective way to deal with deflation. In a non-monetary policy, there will be several important steps. This step will increase the amount of money circulating in society.
4. Lower 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 keeping 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.
Deflation’s positive and negative impacts
The following are the positive and negative impacts of deflation:
1. Positive impact
The positive effects of deflation are as follows:
- The value of the currency will strengthen
- Community awareness will arise regarding the importance of saving to meet future needs.
- People can save more in shopping.
2. Negative Impact
The negative impacts of deflation are as follows:
a. Revenue of the business sector decreased
The state of deflation that occurs in a country will cause many business people to compete. They will reduce 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 lay off employees on a large scale. This was done to reduce salary expenses for each worker.
c. Stock prices and investments declined
When a business continues to experience 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.