Jakarta, CNBC Indonesia – It’s like there is no end to the problems in this world, a recession is sure to happen and now there is another reflation. Both are “invisible enemies”, but their impact is felt in everyday life.
The term reflation was coined by the governor of Bank Indonesia, Perry Warjiyo.
“There is a risk of stagflation, growth is stalled but inflation is high. Indeed, the terms are reflation, risk of recession and high inflation,” Perry said during a working meeting with Commission XI of the DPR , (Monday 21/22/2022).
Perry refers to reflation as the phenomenon of a recession but on the other hand there is a high rate of inflation.
It seems that a recession that will hit several big countries is inevitable, even the world is threatened by the same thing.
Indonesia is far from a recession, but its impact will also be felt. Exports are threatened with decline, as is economic growth.
This condition can exacerbate the cessation of employment (PHK) that occurs in the country in export-oriented companies.
Recession alone has become a serious problem, especially when coupled with high inflation, which means rising prices of goods ranging from basic necessities to tertiary goods. Rising prices will certainly decrease people’s purchasing power.
Inflation in the United States (USA) and Great Britain is at its highest level in 40 years, in the Eurozone it is even the highest in history. This means that citizens of these countries believe that the current price of goods is the highest in 4 decades.
With very high inflation, people’s purchasing power decreases, the recession will get worse.
A recession is generally said to be a contraction in economic growth for two consecutive quarters.
Meanwhile the National Bureau of Economic Research (NBER) doesn’t just look at economic contraction, but defines a recession as “a significant reduction in economic activity that spreads throughout the economy and lasts more than a few months.”
Under normal conditions, when a recession occurs, the central bank will lower interest rates, provide monetary stimulus to stimulate the economy.
The government can also adopt expansionary fiscal policies by increasing spending. For example, when there was a recession due to the corona virus (Covid-19) pandemic of 2020.
Central banks of various countries have been aggressively lowering interest rates, the government has also increased spending, which in turn has stimulated the economy.
However, when reflation cannot be done. Again, reflation is a recession accompanied by high inflation.
When inflation is high, the central bank will tighten its monetary policy by raising the key interest rate. The government also adopted a restrictive fiscal policy, the aim of which was to reduce inflation.
The higher the interest rate, the inflation can be reduced immediately. The problem is that these policies go against the need to revive the economy due to the recession.
The higher the interest rate, the deeper the recession. Complicated!
So a balance between monetary and fiscal policies is needed, to reduce inflation while preventing the economy from suffering a deep recession.
Yes, recession is a way to reduce inflation. When a recession occurs, demand-driven inflation it can be muted and possibly decreased.
The central bank has also adopted this policy. To reduce inflation, the economy was “sacrificed”, a recession was allowed to happen, the main thing was not to delve into it too much.
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