3 Ways to Overcome Inflation with the Right Policies

3 Ways to Overcome Inflation with the Right Policies

Man Walking on Sidewalk Near People Standing and Sitting Beside Curtain-wall Building

In general, the definition of inflation is an economic situation in which prices generally increase in a long time. Temporary price increases such as price increases during the Eid are not considered inflation, because at the time after the Eid, prices can fall again. Inflation can occur because the money supply is more than needed. Inflation is an economic phenomenon that can never be completely eliminated. Efforts are usually done only to the extent of reducing and controlling it.

Inflation can be classified into four groups, namely mild, moderate, severe inflation and hyperinflation. Mild inflation occurs when price increases are below the 10% a year, moderate inflation is between 10% -30% a year, heavy inflation is between 30% -100% a year, and hyperinflation or uncontrolled inflation occurs when a price increase is above 100% a year .

How to Overcome the Inflation Problem
Considering the importance of overcoming the problem of inflation, it needs serious handling in the process. To overcome this, the first thing to do is find out the cause of inflation so that the way to overcome it can be known. Some economists agree that inflation is not only related to the amount of money in circulation, but also related to the amount of goods and services available in the community. Therefore, the right policy is needed to overcome the problem of inflation. There are three policies that can be taken to overcome the problem of inflation, namely monetary policy, fiscal policy and other policies.

1. Monetary Policy
Monetary policy is any form of policy taken by the government in the field of monetary (finance) whose aim is to maintain monetary stability in order to improve the welfare of society. Monetary policy includes.

a. Determination of Cash Inventory Policy
The central bank can adopt a policy to reduce the money supply by determining the supply of money in circulation and establishing the cash supply in banks. By reducing the money supply, inflation can be suppressed.

b. Discount Policy
To overcome inflation, the central bank can implement a discount policy by increasing interest rates. The goal is to encourage people to save. Thus, it is expected that the amount of money in circulation can be reduced so that the inflation rate can be reduced.

c. Open Market Operations Policy
Through this policy, the central bank can reduce the amount of money in circulation by selling securities, for example Government Securities (SUN). The more the number of securities sold, the money supply will decrease so that it can reduce the inflation rate.

2. Fiscal Policy
Fiscal policy is a step to influence government revenue and expenditure. The policy can affect the inflation rate. Fiscal policies include the following.

a. Save Government Expenditures
The government can reduce inflation by reducing spending, so that demand for goods and services decreases, which in turn can reduce prices.

b. Increase Tax Rates
To reduce inflation, the government can raise tax rates. Rising tax rates for households and companies will reduce consumption levels. Reducing the level of consumption can reduce demand for goods and services, so prices can fall.

3. Other Policies
To improve the impact caused by inflation, the government implemented monetary policy and fiscal policy. But in addition to monetary and fiscal policy, the government still has other ways. Another way to control inflation is as follows.

a. Increase Production & Increase Number of Goods in the Market
To increase the amount of goods, the government can issue orders to increase production. This can be achieved by providing premiums or subsidies to companies that can meet certain targets. In addition, to increase the amount of goods in circulation, the government can also loosen import faucets. For example, by reducing import duties on imported goods.

b. Set a Maximum Price for Several Types of Goods
The price fixing will control the existing prices so that inflation can be controlled. But the determination must be realistic. If the determination is not realistic, it can result in a black market.

That is some explanation to overcome inflation. After knowing about inflation above, you must already know how important it is to manage finances. If you are able to manage finances with the right accounting process, then inflation can be prevented.

Leave a Comment