Is Production Affect Inflation?


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Muhammad Khairuddin Bin Ahmad
Fundamental Islamic Economics
Section 6

Is Production Affect Inflation?

Inflation, by its definition, will only change the nominal values of the numbers involved; it would not affect anything else, including product structure or relative income.

However, other characteristics that in the real world always accompany inflation does change both, but in unpredictable ways. You would need more detail to determine what ways they are affected. But with inflation, all prices and wages do NOT increase by the same amount at the same time. Inflation is basically an "average" based on a predetermined "bundle" of goods. This "average", besides not including every price and wage in the economy, consists of many different changes in prices. Since price and wage changes are not all the same, the production structure will vary as costs vary, income will vary as some wages are more sticky than others (and sticky wages means that workers are always at least one step behind inflation).

Another characteristic that influences the effect of inflation is the accuracy of its predictability. If inflation could be predicted with 100% accuracy, then its effects would be written into every contract (including interest rates), and there would be no associated wealth redistribution. But to the extent that it is not predicted 100%, there will be some kind of gains and losses between creditors and debtors.

In the other words, production will effect the inflation to be gone. It can be done by decreasing the wages of the worker for instant. If, the wages decrease the purchasing power of people also decrease, so that the inflation rate will decrease until economy become stable. Actually it depends on how the concept of inflation been interpret in economy. Because there are two type of inflation, which, demand-pull inflation and cost-push. If demand-pull occured in economy, the economy will be leakage only on production because prices increase because spending increases faster than production. This situation will terminated by decrease of wages. When the wages decrease, purchasing power of consumer also decrease, without doubt inflation also will be eliminated.

However, it’s differ for the cost-push whenever price increase because of increase in (per unit) cost of production. It usually caused by supply shock. If this situation happen, production should be decrease so that, spending will run in smoothly. If spending does not also increase, economy will die out in recession.