in discussion of inflationIt can be concluded that, in general, a simultaneous controlled increase in the price of goods (inflation) is a sign that the economy is doing well. The reason is when economic conditions are good. Many people get jobs and get good pay. As a result, their purchasing power increases, raising the price of daily necessities (demand-pull inflation).
However, in some cases, such as during the 1998 crisis or the Great Depression, High inflation is accompanied by a rather severe economic downturn. in economic theory This disorder is known as stagflation.
Definition of Stagflation
Stagflation is an economic condition in which prices of goods and services increase (inflation), but economic growth slows and unemployment increases. The existence of deadlocks will make it difficult for policymakers to formulate the right policy. This is because policies aimed at reducing inflation can worsen the economy.
Why is that? Generally due to inflation, bank interest rates will increase. Hope people save more and reduce the amount of money circulating in society. However, if what happens is deflation. Rising interest rates will make people more miserable. The reason for this is that the industry is unable to repay the exorbitant interest rates of banks. While the general public does not have money ready to save.
The term stagflation was first used by British politician Iain Norman Macleod in 1965, before Macleod introduced the term. (Recession) is inversely related. (If inflation is high The economy is not in a recession and is inferior. vice versa). But after 1970, many developed countries faced this problem.
Causes of Stagflation
The cause of stagflation is uncertain, however, here are some factors that have contributed to this phenomenon in the past:
1. Pay impact
A supply shock is a phenomenon of sudden and drastic change in one of the factors of production. This factor was first identified in the 1970s, when member states of the Organization of the Petroleum Exporting Countries (OPEC) imposed economic sanctions on Western countries for their support of Israel.
Because the commodity that has skyrocketed in price is crude oil. This is necessary for fuel and other industrial needs. Coincidentally, the cost of producing goods and services in Western countries automatically increases as well. As a result, many workers were laid off to reduce the company’s budget.
2. Bad economic policy
Another factor blamed for inflation is poor economic policy. In this case, the application fiscal and monetary policy Inappropriate in terms of time and practice can lead to deadlocks.
3. Changing the currency standard from a fixed rate to a floating rate
At the same time that Middle Eastern countries imposed sanctions against Western countries. The United States under President Richard Nixon decided to change the currency standard from a fixed rate based on gold to a benchmark (gold standard), become floating interest rate.
This means that one dollar is no longer necessarily equivalent to a certain amount of gold. But the value of one dollar is adjusted according to the demand and supply of that currency in the market. Many experts say this is one of the causes of stagflation.
Effects of Stagflation on the Economy
1. Economic uncertainty
As mentioned above, the terms of stagflation can make economic policymakers Both fiscal and monetary policies Confused to formulate the correct policy “formula” They need to come up with a set of policies that can reduce inflation. But it can also increase the purchasing power of the people.
2. The country’s productivity has decreased.
Low public purchasing power and high inflation will have a domino effect on the industry. On the one hand, it will be difficult for companies to find consumers. but vice versa Production costs continue to increase. As a result, the company had to lay off a large number of employees.
3. Decreased investment
Falling company earnings and uncertain economic conditions will make both domestic and international investors think twice before buying stocks in the country. As a result, the average investment value of the country decreased.
Examples of Stagflation
A prime example of inflation that occurred in the 1970s in the United States. as mentioned above This can happen due to a combination of supply disruptions due to OPEC embargoes, changes in currency standards. and bad economic policies
in the early 1970s gross domestic product (GDP) Uncle Sam’s Country has fallen for 5 consecutive quarters. In contrast to GDP, an increase in oil prices doubled inflation in 1973. The increase in oil prices and inflation also resulted in a 9% increase in the number of unemployed.
Indonesia is also said to have experienced this step in 1998. At that time, Bank Indonesia decided to change the rupiah dollar exchange rate system from a fixed rate to a floating rate because there was no foreign exchange rate to “bail”. . As a result, the exchange rate of the rupiah decreased. This brought inflation to almost 77%, especially for imported goods. And at the same time GDP fell by -13%.
How to deal with stagflation
Aside from the fact that the primary causative factor remains unclear. It may be that the causes of stagflation are different from country to country. Policymakers first need to identify the root causes of the stagnation in their countries.
Only when the cause is known The Indonesian government and banks will then be able to formulate and implement policies. macroeconomics Appropriate. The aim is to improve one economic indicator, not to weaken other economic indicators.
As for the social stagnation, it is the time when belts must be tightened and returned to nature. high prices of goods and services as well as high unemployment It inevitably causes people to save money and plan their finances.
One way to tighten your belt without compromising your physical and mental state is to go back to nature, for example, to save money on chili or herbs. People can start growing their own Family Herbs (TOGA) at home, either in soil or with hydroponics. another example instead of using expensive cooking oils People can switch to bricks or firewood for fuel.
Although this is a relatively rare phenomenon. especially in Indonesia But that doesn’t mean the country is free from global deflation risks. However, it doesn’t mean Indonesians can’t cope with it.