Inflation Theory: Conventional vs. Islamic Perspectives


By: Djaka Suryadi,PhD*

Djaka Suryadi

Conventional Theory
In mainstream economics, inflation is defined as a general and sustained increase in the prices of goods and services. Key theories include:

    • Demand-pull inflation: Occurs when aggregate demand exceeds production capacity.
    • Cost-push inflation: Triggered by rising production costs such as wages and raw materials.
    • Monetarist theory (Milton Friedman): Argues that inflation is a monetary phenomenon caused by excessive growth in the money supply relative to real output.
    • Keynesian theory: Emphasizes the role of expectations and fiscal policy in managing inflation.
    1. Islamic Theory
      From an Islamic perspective, inflation is categorized into two types:
    • Natural Inflation: Arises from natural factors such as crop failure or disasters, viewed as a divine test.
    • Human-induced Inflation: Results from human misconduct such as corruption, price manipulation, excessive taxation, and printing money without real asset backing.

    Imam Al-Maqrizi, a classical economist from Al-Azhar University, attributed inflation in 15th-century Egypt to the use of fiat currency without gold or silver backing and administrative corruption. His view aligns with critiques of modern fiat money systems.

    ⚖️ Gap in Causal Factors

    The fundamental differences between conventional and Islamic views on inflation are summarized below: Factor Conventional Economics Islamic Economics Source of Inflation Market dynamics, monetary policy Moral, spiritual, and monetary misconduct Solutions Fiscal/monetary intervention Moral reform, zakat, prohibition of usury Currency Fiat money accepted Must be backed by real assets (gold/silver) Taxation Primary fiscal tool Limited; replaced by zakat and waqf.

    Islamic Solutions to Eliminate Inflation

    Islam offers structural and spiritual remedies to address inflation:

    1. Prohibition of Usury (Riba)
      Usury leads to wealth concentration and speculative behavior. Islamic finance promotes asset-backed financing and partnership-based contracts (e.g., mudharabah, musyarakah).
    2. Zakat and Waqf
      Wealth redistribution through zakat and waqf reduces social inequality and boosts the purchasing power of the poor without inflationary pressure.
    3. Asset-backed Currency
      Using dinar and dirham or digital currencies backed by gold prevents excessive money printing and maintains currency stability.
    4. Business Ethics
      Islam emphasizes honesty, prohibits hoarding (ihtikar), and price manipulation. Markets must be transparent and fair.
    5. Islamic Fiscal Policy
      Governments should avoid interest-based debt and fund development through Islamic instruments such as sukuk, productive waqf, and Islamic social finance.

    Strategic Targets for the Remaining Administration: Zero Inflation, Equitable Islamic Growth

    To achieve zero inflation and equitable Islamic economic growth, the government can pursue the following strategic goals:

    1. Monetary Reform
    • Reduce reliance on fiat currency.
    • Promote asset-backed payment systems and Islamic stablecoins.
    1. Zakat and Waqf Optimization
    • Digitize zakat and waqf for efficient distribution.
    • Integrate zakat into the national budget as a redistribution tool.
    1. Empowering Islamic MSMEs
    • Provide profit-sharing financing.
    • Support halal business certification and mentorship.
    1. Islamic Economic Education
    • Introduce Islamic economics in schools and universities.
    • Train entrepreneurs and civil servants in Islamic finance.
    1. Transparency and Anti-Corruption
    • Digitize budgeting and oversight using blockchain.
    • Strengthen Islamic supervisory institutions and public accountability.
    1. Justice-based Development
    • Prioritize underdeveloped regions.
    • Implement need-based subsidies instead of quota-based systems.

    Toward an Inflation-Free Indonesia

    Eliminating inflation is not merely utopian. By consistently applying Islamic principles, Indonesia can:

    • Stabilize prices through fair markets.
    • Enhance welfare through wealth redistribution.
    • Achieve inclusive and sustainable economic growth.

    As Prophet Muhammad (peace be upon him) said:
    “The honest and trustworthy merchant will be with the Prophets, the truthful, and the martyrs.” (Narrated by Tirmidhi).

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    About the writer:

    Djaka Suryadi is an observer of sharia law and sharia finance. He got Islamic Finance PhD from one of university in Malaysia. 

    In Indonesia, he is an islamic banker and working for private bank for 28 years, and also to be a lecturer of Islamic law and Islamic finance for 18 years in universities.