Inflation or rising prices of goods can make us lose purchasing power. What is meant by inflation and how do we fight it?

What is inflation?

Investopedia describes Inflation as a rise in prices, which can be translated as the decline of purchasing power over time.

The following illustrates the increase in the price of a cup of coffee by 5% each year and how many cups of coffee can be purchased with IDR 100,000.

Based on the illustration above, we can conclude that when there is inflation, our money will decrease in value. How much will IDR 100,000,000 decrease in 20 years if inflation is 5% per year?

How to read the chart above: If inflation is 5% (blue line), in 5 years the value of IDR 100 million will decrease to IDR 78 million. This means that the money will lose almost a quarter of its value.

If inflation is 8% (black line), in 10 years the value of IDR 100 million will be decrease to IDR 46 million. This means that the money will lose half its value.

Inflasi in Indonesia

The following is inflation data in Indonesia from 2014 – February 2023.

From 2014 to 2016, Indonesia's inflation was in the range of 6% - 9% per year. In 2016 – 2020 the Government of Indonesia managed to maintain inflation in the range of 2% - 5% per year.

In 2020 – 2022 Indonesia's inflation fell below 2% as an impact of slowing economic growth (economic recession).

The Indonesian government controls inflation in various ways such as through monetary policy by Bank Indonesia. One of the ways to maintain inflation balance is with interest rate policy.

Caption: When inflation rises sharply (black dotted line), Bank Indonesia tends to increase interest rates (blue line). The hope is that people will start to put the brakes on spending and prefer to save or invest. When inflation falls (black dotted line), Bank Indonesia tends to lower interest rates (blue line in hopes people start spending more.

In addition to monetary policy from Bank Indonesia, the Indonesian government has a National Inflation Control Team (TPIN). The team was formed based on the Decree of the President of the Republic of Indonesia Number 23 of 2017.

The team consists of:

• Central Inflation Control Team
• Provincial Regional Inflation Control Team
• Regency/City Regional Inflation Control Team

Pro and Cons of Inflation

Inflation and other macroeconomic indicators certainly have their pros and cons.

Pros of Inflation

• The prices of goods increase. For example, land prices that continue to increase, merchandise has increased, etc.
• Controlled inflation can encourage people to spend. For example, when the COVID-19 outbreak occurred, the Indonesian government provided a free VAT stimulus for buying houses.
• Inflation shows the economy is growing.

Cons of Inflation

• We as buyers have to pay more for the same goods. For example, a cup of coffee used to be 27 thousand, but now it is 35 thousand.
• The value of money decreases (decrease in purchasing power).

3 Causes of Inflation

Inflation can be caused by three things, namely demand push, cost-push, and built in. Here are the differences among the three.

Demand Pull Inflation

Demand-pull inflation occurs because of a price increase caused by an increase in demand, while supplies are stable resulting in a shortage of goods.

During the COVID-19 outbreak, many people suddenly needed more masks and hand sanitizers. Suddenly, masks and hand sanitizers became scarce and their prices increased sharply.

Cost Push Inflation

Cost-push inflation occurs when there isis a price increase caused by an increase in production costs.

Food prices have experienced a sharp increase. One of the reasons for this is the 200% increase in the price of urea fertilizer throughout 2021.

Built In Inflation

Increases that occur due to economic impacts, such as increases in labor costs to maintain living standards. The increase in labor costs will certainly increase the selling price.

Indexes used to Measure Inflation

According to the CFA Institute [3] when selecting investment products, one should consider the following 7 factors:

Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures the increase in the price of goods or services over a certain period. The CPI calculation incorporates the following variables:

• building materials and shelter
• food
• health
• apparel
• entertainment and recreation
• education and communication
• delivery

Producer Price Index (PPI)

Producer Price Index (PPI) is the average price change received by producers.

How to Deal with Inflation

One way to deal with inflation is to invest. Investments can make your money grow year after year.

Example: Indonesia's inflation is 5% per year, while investment returns are 10% per year. This means your money will grow by 10% - 5% = 5% per year.

If you want to invest, start by studying investment products or consulting an expert (wealth advisor).

Working with a Licensed Advisor

You can consult regarding your investment portfolio with a Moduit wealth advisor. PT Moduit Digital Indonesia is an investment advisory company under OJK (Decree: KEP-30/D.04/2019).

Becoming a Moduit Beyond client is as simple as completing a brief registration form. Initial investment starts at IDR 1 billion. The benefits of becoming a Moduit Beyond client include:

• Personal advisor
• Curated financial products
• Priority access for newly launched products & services
• Daily reports on the market
• Priority call center
• Exclusive lounge access
• Year-end gifts

You can become a Moduit Beyond client by contacting us on this form or reaching out to a Moduit Beyond advisor partner.