What Happened with us If High Inflation and Interest Rate?

The risk of inflation and high-interest rates is haunting the world. Beyond that fear, have you ever asked yourself, what impact will rising inflation and interest rates have on your life? Will it have that bad impact on my life?

What Causes High Inflation

Meme when central bank rising interest rate at high commodity price

The United States recorded the highest inflation in 40 years in 2022. America’s high inflation was caused by high commodity price increases. The spike in commodity prices rose due to the return of world demand to normal after the Covid-19 pandemic. Finally, rising raw material costs pushed up tariffs on electricity and basic goods in the US.

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The rise in commodity prices became even more frenzied when Russia and Ukraine went to war. Economic sanctions against Russia imposed by western countries have reduced global commodity supplies. You see, Russia is one of the commodity exporter countries.

Indonesia also experienced an increase in inflation in April 2022. Indonesia’s annual inflation rose to 3.47 percent, the highest level since December 2017. Indonesia’s inflation rate has always been stable at below 3 percent during the Covid-19 pandemic.

Indonesia’s inflation increased due to rising commodity prices such as world oil and palm oil. This triggered an increase in the price of non-subsidized fuel oil (BBM) and there was a shift from Premium subsidized fuel to Pertalite, which differed in price by around Rp. 1,000 per liter.

In addition, the high price of palm oil made cooking oil prices skyrocket. Finally, the impact on products cooked with cooking oil also increases.

What is Inflation?

Inflation is a momentum in which the value of money decreases. For example, IDR 5,000 can buy 50 fried foods in the 1990s, but in 2022, you can only buy a maximum of 3 fried foods.

The price of fried food seems to have increased, but the value of money has also decreased. This could be due to increased circulation of money, high consumer demand, a dwindling supply of raw materials, or rising raw material prices due to price fluctuations in the world. All of these factors are caused by the laws of economics, namely supply and demand.

Better Inflation or Deflation?

Deflation is not better than inflation

I used to think that deflation was better than inflation when I was in school. I think deflation is better because it can lower the selling price of products and increase the value that people have. This means I feel I can buy toys at a cheaper price too. That is the thinking of elementary school children who have been introduced to the term inflation-deflation.

Indonesia’s average inflation rate was around 10% in the period 1990-to 2000 when I was still in elementary school.

When I became an economic journalist at one of the media outlets in Jakarta, I realized that inflation was easier to control than deflation. Moreover, healthy inflation can be called an economic indicator of a good growth trend.

Inflation can be controlled by increasing the central bank’s benchmark interest rate. This move will be effective if it occurs in conditions of a healthy inflation.

In contrast to inflation, deflation occurs because demand falls, so selling prices fall. However, the public did not immediately respond to the decline in product prices because the economy was not doing well.

A reduction in central bank interest rates is not necessarily a quick solution to save yourself from deflation. The role of the government that holds fiscal policy is more important to save the country from deflation.

What is Healthy and Unhealthy Inflation?

Inflation with the economy slowdown

Healthy inflation is inflation that occurs with the support of solid economic growth to a low unemployment rate. This means that there is an increase in demand in society which makes the value of money fall.

However, healthy inflation can become unhealthy if allowed to rise too high. Good inflation is moving steadily, not fluctuating.

Meanwhile, unhealthy inflation occurs when the increase in the price of goods is not caused by public demand, but by an increase in the price of raw materials due to external factors. Unhealthy conditions can occur when demand from the public has not recovered, but prices have increased.

Finally, there is the potential for a decrease in public demand and prices will continue to rise. In the end, inflation rises, but economic growth slows down plus the unemployment rate increases, the cool term is stagflation.

When there is stagflation, an increase in central bank interest rates is not necessarily an efficacious move to reduce the increase in inflation. It could turn against the economy.

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Why Should High Inflation Raise Interest Rates?

All economic activities are formed by supply alias availability of goods and demand alias demand. Plus, government and mafia intervention in the market. All of that applies from buying snacks, and groceries, to investing in stocks.

When inflation is high, there are two possibilities for large public demand or rising raw material prices. However, the main indication is that high inflation is caused by a large circulation of money due to high demand from the public.

For this reason, to reduce the circulation or supply of large money, the monetary institution, namely the central bank, needs to temporarily reduce the amount of money in circulation.

The trick is not to withdraw money that is in the community directly manually. However, with several monetary instruments, one of which is the reference interest rate.

By raising the benchmark interest rate, banks may be more interested in saving their money in the form of central bank securities or bonds rather than extending risky credit. Likewise, for the community, an increase in interest rates can be a driving force for them to place their funds in deposits or bonds.

Here, theoretically, funds that are or should be available to the public are automatically absorbed into the financial system. With the money supply decreasing, the inflation rate is also expected to decrease gradually.

What Happens to Our Lives When Inflation and Interest Rates Rise?

Inflation (blue) and Bank Indonesia’s Interest Rate (red) at 2005–2022

Honestly, if asked what will happen to our lives in the future when inflation or interest rates are at high levels, I can’t answer anything. The reason is that everyone’s condition is different. The condition of each person from year to year can change.

As an illustration, I will tell you about my experience when facing inflation and high-interest rates. There were three periods of inflation and high-interest rates that I took, namely 2005, 2008, and 2013–2014.

Experience with High Inflation and Interest Rates in 2005

I was 15 years old in 2005 or the equivalent of an 8th-grade junior high school at that time. Indonesia’s inflation in 2005 was quite high at 17.11 percent compared to 6.4 percent in 2004. Bank Indonesia’s benchmark interest rate was also high at 12.75 percent.

What I felt throughout 2005 was a significant increase in the price of some snacks. Previously, I could buy 5 fried foods with IDR 1,000 in 1st grade of junior high school. However, I was only able to buy 3 fried foods for Rp. 1,000 when I was in 2nd grade of junior high school.

Not only do price increases, but some traders also sell products with fewer forms and contents. One of them is a burger man.

They can still sell the price of a burger worth Rp. 2,000. However, the meat inside was reduced to only a quarter. Meanwhile, the price of a burger with 1 whole smoked meat is Rp. 5,000.

The cost of public transportation and motorcycle taxis has also increased. The angkot, which used to be IDR 1,000 one way, has increased to IDR 1,500. Ojeks, which were previously Rp. 2,000, have become Rp. 3,000. This was also driven by the increase in the price of Premium fuel which rose to Rp4,500 per liter compared to Rp1,800 per liter in the previous period.

As a junior high school student, I could only frown because pocket money did not increase, but all snacks and costs increased. In my heart, the government is not right.

Experience of High Inflation and Interest Rates in 2008

I was 18 years old or the equivalent of 11th grade in high school in 2008. At that time, Indonesia’s inflation was around 11.06 percent compared to 6.59 percent in 2007. Interest rates were also at 9.25 percent compared to 8 percent in 2007.

The thing I felt when inflation and high-interest rates were high in 2008 was somewhat similar to 2005, namely the increase in the prices of snacks and public transportation. Moreover, when Premium fuel was increased to reach Rp. 6,000 per liter at that time.

Most remember the price of rice + katsu rose from IDR 4,500 to IDR 5,000 per serving. The price of Soto also increased from IDR 2,500 to IDR 3,000. The cost of public transportation rose from Rp. 1,500 to Rp. 2,000. However, some school children, including myself, were stubborn and kept giving Rp. 1,500 after that they ran away.

However, the price increase in 2008 was not as severe as in 2005. In fact, at that time the US was experiencing a financial crisis. This may be because my life is still dependent on my parents.

Experience of High Inflation and Interest Rates in 2013–2014

In contrast to the 2005 and 2008 periods, I was in the final period of college and the early period of working from mid-2013-to 2014. Indonesia’s inflation for two consecutive years was at the level of 8 percent compared to 4 percent in 2012. Then, the benchmark interest rate was around 7.5 percent compared to 5.75 percent in the previous period.

Honestly, even though inflation is rising high and I’ve been living alone in boarding houses, even though I still get pocket money. There was no significant impact felt from inflation in 2013–2014. I don’t know, maybe at that time, I was dizzy thinking about the script.

One thing I remember is that there was an increase in the price of travel from Jatinangor to Bandung in the middle from Rp. 10,000 to Rp. 15,000. However, I forgot the detailed figures and at that time I did not think of it because of the effects of inflation and the increase in fuel prices to Rp. 8,500 per liter from Rp. 6,500 per liter.

You see, travel has just launched, so I thought that the promotion period had just ended. Overall, did not feel the increase in food prices. Maybe because it’s in the campus area, so the portions and seasoning components are adjusted accordingly.

When I started the early stages of work in the second quarter of 2014, I didn’t feel the price increase. You see, I have lived in Jatinangor for about 4.5 years, when I arrived in Jakarta, all prices had gone up without knowing the initial price. Most remember, the price of fried foods in Jakarta at that time was Rp. 1,500 per fried and a package of 4 fried foods was worth Rp. 5,000. A much higher number compared to 2005 and 2008 right?

From here, I admit that I have never faced inflation and high-interest rates independently. When interest rates were high in the three periods, I didn’t even think about where to put the money? deposits or retail government securities, or stocks?

Currently, when interest rates rise, I might be a little happy because there is a small number of emergency funds placed in a deposit at one of the big banks. You see, the deposit interest rate will increase from its current position of only 1.5 percent for a one-month tenor.

However, it is also a headache, if inflation rises and interest rates rise, it will be difficult to plan to take homeownership loans (KPR). However, will the increase in inflation and benchmark interest rates have the same impact as I expected? yeah, no one knows anyway.

Can you tell us about your experience during periods of high inflation and interest rates?

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Surya Rianto

Surya Rianto

Content Creator | Blogger | Stock Enthusiast | Crypto Newbie | Ex Journalist