What are the effects of inflation?

This common question is often asked by new

investors embarking on their journey towards financial independence. To ensure we
are on the same page, before we dive into the inflation's effects, it is best to start by
defining inflation in stark terms. Properly used, and as I will employ it for the
remainder of our discussion, the term inflation refers to the depreciation in
purchasing power of a fiat currency, often resulting in the appearance of rising prices
when you attempt to buy essentials such as wheat, milk, meat, clothing, medical
services, coffee, or electricity.

In other words, inflation refers to a situation in which you find that it takes more units
of currency — if you are in the United States, it would be U.S. dollars — to buy
goods and services than it took you yesterday or last year to buy the same goods
and services.

Historically, for domestic investors, a high inflation rate has been

considered anything over the 3% to 4% annual range with the 3% to 4% figure
considered benign. This rate, which would be a godsend for most of the world, is
caused by numerous things, some of which have to do with certain monetary and
structural advantages in the U.S. economy that may not last indefinitely. That said,
for the past decade, the country has experienced a historically low interest rate
environment due to unprecedented intervention in the monetary system by the
Federal Reserve and lawmakers as part of the efforts to stave off collapse of the
global economic system back between 2007 and 2009 when the real estate bubble
peaked and imploded, dragging down all sorts of asset classes with it, including the
stock market.

Still, if history is any guide, it's useful to pay attention to inflation because it's bound
to rear its head again at some point in the future. What are the specific effects of
inflation? Why should you be concerned about its spectre haunting the economy?

Inflation Begins with Money Losing Value

To understand the effects of inflation, I want you to think about a few numbers:

 A $1.00 bill in 1971 had the same purchasing power as $5.95 does in 2016. That is,
what we call $1.00 today would only buy 16.8¢ worth of goods in 1971.
 A £1.00 bill in 1971 had the same purchasing power as £14.00 does in 2016. That is,
what we call £1.00 today would only buy £0.07 worth of goods in 1971.

As you can see, the major effect of inflation is that a nation's nominal currency loses
value - it takes more Dollars, or Pounds Sterling, or Euros, or Yen, or Swiss Francs,
to buy the same quantity of goods. The obvious consequence, or effect, of this is
that inflation makes it more difficult for people to afford the basic necessities, not to
mention luxuries, of life if their labor is n’uvzot able to keep pace with the inflation
rate. This causes families to struggle as they attempt to keep up with the price of
everything from cornflakes to college tuition.

As you can see, high rates of inflation can cause major problems as time
progresses.
Inflation Transfers Money From Savers and Investors to Debtors

Moving beyond the basic effects of inflation, you come to realize there are two other
major effects of inflation.

1. The effect of inflation on savers and investors is that they lose purchasing
power. Whether you've buried your money in a coffee can in the backyard or it's
sitting in the safest bank in the world, it is becoming less valuable with the passage of
time. This can create an incentive to spend money or, under the wrong conditions, a
disincentive to invest money in things that would otherwise be good for civilization in
the long-run.

1. The effect of inflation on debtors is positive because debtors can pay their debts with
money that is less valuable. If you owed $100,000 at 5% interest, but inflation
suddenly spiked to 20% per year, you are effectively watching 15% of your debt get
paid off each year, totally free to you. At some point, you'd be able to get a minimum
wage job for $100 per hour and obliterate your debt.

Put more bluntly, the net effect of inflation is that it serves to transfer money from
savers and investors to debtors. It punishes those who postponed their enjoyment
and invested in building roads, schools, factories, and businesses and gives their
reward to those who are in debt. It is a severe moral injustice, mostly caused by
governments printing money — or, these days, making electronic entries — to cover
expenses that cannot be paid out of the general treasury revenue.

Fundamental ekonomi Indonesia dinilai terus menguat. Penguatan itu

terlihat dari tingkat pertumbuhan ekonomi yang tinggi. Terbukti, di tengah
ketidakpastian ekonomi global Indonesia masih bisa tumbuh 5,02% tahun
lalu.

Bank Dunia (World Bank) pun memproyeksikan pertumbuhan ekonomi

Indonesia tahun 2017 ini sebesar 5,2%. Pertumbuhan ekonomi yang lebih
kuat serta harga komoditas yang lebih tinggi dinilai menjadi pendorong
utama.

"Pertumbuhan ekonomi naik pertama kali dalam 5 tahun terakhir. PDB

2016 bisa mencapai 5,02% dari 4,9% di 2015, itu kabar baik. Setelah
penguatan di 2016, pertumbuhan ekonomi 2017 diharapkan akan sangat
membantu bagi kenaikan harga komoditas dan diharapkan bisa
mendorong pertumbuhan ekonomi 5,2% dan 5,3% di 2018," kata Kepala
Perwakilan Bank Dunia di Indonesia, Rodrigo Chaves saat acara Indonesia
Economic Quarterly, di Energy Building, SCBD, Jakarta, Senin (22/3/2017).
Pertumbuhan konsumsi rumah tangga juga diproyeksikan akan meningkat
karena nilai tukar rupiah yang stabil. Sementara, upah riil yang lebih tinggi
dan angka pengangguran yang terus menurun memberi dukungan bagi
peningkatan daya beli konsumen .

Pertumbuhan investasi swasta iuga diperkirakan meningkat oleh karena

harga komoditas yang sudah pulih kembali, serta efek dari pelonggaran
moneter pada 2016 serta reformasi ekonomi baru-baru ini. Pada saat yang
sama, harga komoditas yang lebih tinggi juga akan mengurangi kendala
fiskal dan meningkatkan belanja pemerintah, sedangkan pertumbuhan
global yang menguat akan meningkatkan ekspor.

Namun, Indonesia juga masih perlu mewaspadai kondisi global saat ini.
Antara lain dari perubahan dalam kebijakan perdagangan di negara-negara
maju, perubahan yang tidak terduga dalam kebijakan moneter AS,
ketidakpastian politik di Eropa, meningkatnya inflasi domestik yang
berkepanjangan, dan penerimaan fiskal yang lemah memberikan risiko
penurunan yang signifikan.

"Pihak otoritas masih waspadai beberapa risiko agar bisa menjangkau

setiap peluang secara hati-hati. Peluang juga datang dari perekonomian
global sehingga meningkatkan perekonomian Indonesia. Juga harus
memastikan pertumbuhan ekonomi berjalan inklusif sehingga memberi
peluang bagi seluruh rakyat," kata dia.

Sementara, Bank Dunia memproyeksi laju inflasi bakal melonjak dari 3,5%
pada 2016, menjadi 4,3% di 2017 ini. Pendorongnya ialah, adanya
penyesuaian tarif listrik dan pajak kendaraan bermotor. Namun demikian,
inflasi diproyeksikan akan kembali turun pada tahun 2018, karena
hilangnya efek kenaikan harga.

Defisit fiskal juga diproyeksikan akan meningkat oleh karena meningkatnya

investasi infrastruktur publik. Keseimbangan fiskal pemerintah pusat
diproyeksikan sebesar 2,6% dari PDB pada tahun 2017, lebih besar dan
defisit sebesar 2,4% dalam APBN Pemerintah tahun 2017 yang sudah
disetujui.

Belanja publik yang lebih tinggi, sebagian karena adanya upaya baru untuk
meningkatkan investasi infrastruktur publik, diharapkan sebagian akan
diimbangi oleh pertumbuhan penerimaan, yang pada gilirannya akan
dihasilkan oleh pertumbuhan PDB yang lebih kuat dan dividen dari
reformasi kebijakan administrasi dan perpajakan.

Peningkatan laju inflasi yang berkepanjangan oleh karena kenaikan harga,

dapat menimbulkan risiko penurunan yang besar bagi pertumbuhan
konsumsi. Terlepas dari gejolak nilai tukar, konsumen pada umumnya
sensitif terhadap kenajkan harga, terutama harga makanan, dan konsumsi
rumah tangga merupakan bagian dominan perekonomian Indonesia.

Jika inflasi tetap tinggi dan lebih lama dari yang diperkirakan, pengeluaran
konsumen dapat menurun, yang mengakibatkan pertumbuhan output yang
lebih rendah. Selain itu, Bank Indonesia dapat terdorong untuk
memperketat kebijakan moneter, yang juga akan meredam pertumbuhan
investasi.
Only one report (the 2006 State of World Liberty Index, released 12 August 2006) was
produced by the State of World Liberty Project and the original website is now defunct.
However, Patrick Rhamey, professor in the Department of International Studies at the
Virginia Military Institute [1], has updated the rankings through 2017 using the same concept,
with some adjustments to the original method

In the 2017 index, New Zealand is ranked most free overall, while North Korea is
last. Hong Kong was ranked most free in economic liberty, and Finland, Norway,
and Sweden were ranked most free in the social liberty category.

Rank Country Rank Country

1 New Zealand 173 Iran

2 Switzerland 174 Central African Republic

3 Canada 175 Equatorial Guinea

3 Australia 176 Turkmenistan

5 Norway 177 Cuba

5 Sweden 178 Eritrea

5 Luxembourg 179 Venezuela

5 Finland 180 Libya

9 Netherlands 180 Syria

9 Ireland 182 North Korea