What is Demand-Pull Inflation? Its Relationship to Finance Minister Purbaya's Policies

Inflation is always a hot topic when discussing economics. One type of inflation often discussed is demand-pull inflation. Recently, Finance Minister Purbaya Yudhi Sadewa has been in the spotlight for his policy of channeling Rp 200 trillion to banks.

This policy raises the question: can it influence inflation, especially from the demand side?

We will briefly review what demand-pull inflation is, its relationship to Finance Minister Purbaya's policies, and its implications for the Indonesian economy.

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What is Demand-Pull Inflation?

Demand-pull inflation is a price increase that occurs when demand for goods and services exceeds supply. Economists often describe this condition as too much money chasing too few goods.

When consumers have greater purchasing power while production is limited, prices rise.

This type of inflation typically occurs in rapidly growing economic situations. For example, when unemployment is low, people have more income, and consumption increases.

As a result, producers are overwhelmed in meeting market demand, and prices are pushed up.

The concept of demand-pull inflation differs from cost-push inflation. In cost-push inflation, prices rise due to increased production costs. In demand-pull inflation, price spikes occur because demand significantly exceeds supply.

Finance Minister Purbaya's Policy and Inflation Implications

Finance Minister Purbaya Yudhi Sadewa distributed Rp200 trillion to five major national banks. Bank Mandiri, BRI, and BNI each received Rp55 trillion, BTN Rp25 trillion, and BSI Rp10 trillion.

These funds are placed in the form of on-call deposits as part of the liquidity policy.

Economists consider this measure positive because it can stimulate credit growth, investment, and consumption. However, some question whether this policy could trigger demand-pull inflation.

If liquidity is too great, consumption increases rapidly, and then the supply of goods is insufficient, inflation can rise.

Despite this, several analysts believe the risk of inflation remains manageable. Indonesia's inflation projection for 2025 is only around 2.21 percent, and 2.29 percent in 2026. This figure is considered stable. This means that the funds disbursed are not significant enough to trigger an excessive surge in demand.

Factors Causing Demand Pull Inflation

Several main factors can trigger demand-pull inflation. First, rapid economic growth increases people's purchasing power. Second, high government spending can increase aggregate demand.

Third, expectations of future inflation also cause producers to raise prices earlier.

Furthermore, increased exports can reduce the domestic supply of goods, pushing up prices. Excessive money supply is also a significant factor. If the money supply exceeds the supply of goods, prices will inevitably rise.

In the Indonesian context, the government's policy of channeling funds to banks could increase liquidity. However, because growth in the supply of goods and services remains in line with demand, the risk of demand-pull inflation remains small.

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Impact of Policy on the Economy

Although the potential for inflation remains low, Finance Minister Purbaya's policies could stimulate bank credit growth. With additional liquidity, banks have more freedom to channel credit to productive sectors. Credit growth is estimated to reach 7 to 11 percent.

Sectors with potential for growth include household consumption, retail, transportation, property, information technology, and the food industry. Growth in these sectors could increase employment and increase incomes.

If the funds are distributed effectively, the impact will be more on economic growth than on inflation. In other words, this policy is more about stimulating growth than triggering demand-pull inflation.

Conclusion

Demand-pull inflation is a price increase caused by demand exceeding supply. Finance Minister Purbaya's policy of channeling Rp200 trillion to banks raises questions about whether it could trigger this type of inflation.

However, analysts assess the risk as low, as Indonesian inflation is projected to remain stable. This policy will actually boost credit and economic growth.

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FAQ

What is demand pull inflation?

Demand pull inflation is a price increase when demand for goods and services is greater than the supply available.

Does Finance Minister Purbaya's policy trigger inflation?

The inflation risk from this policy is low, as inflation is projected to remain stable at around 2.2 percent.

What is the difference between demand pull inflation and cost push inflation?

Demand pull is caused by a surge in demand, while cost push arises due to an increase in production costs.

What factors cause demand pull inflation?

Rapid economic growth, government spending, inflation expectations, high exports, and excess money circulation.

What is the positive impact of the IDR 200 trillion policy on banking?

Increase credit, strengthen the real sector, increase employment, and encourage economic growth.