Inflation. Causes of its occurrence and types
It is not difficult to formulate what inflation is in general - it is the depreciation of money caused by the excess of the money supply over the totality of goods. I have written many articles on my blog that include this concept - however, the concept of inflation is not limited to one definition. Let's also try to figure out what reasons affect the rate of inflation or, for example, why the government does not freeze prices, showing concern for the well-being of citizens.
At the same time, it is clear that the higher the inflation rate, the faster money depreciates. Let's look at this picture:
In total, even with a relatively low inflation of 5% per year (approximately the average inflation has been in the United States over the past half century), after 10 years almost 40% of the capital is “eaten up”, and after 50 years less than 10% of the value remains from it. From the mid-1930s to 2011, only a little over 5% of its former purchasing power remained of the dollar:
At the same time, with high inflation at the level of 15% per year, after only 5 years, only half of its original value remains from the money. Bets on bank deposits are approximately equal to inflation and in some years can even overtake it, however, over long distances, inflation manages to “eat off” some of the capital from deposits.
Kinds and types of inflation
The most common qualification is to distinguish between types of inflation according to growth rates:
- moderate, or creeping - below 10% per year;
- galloping - from 10 to 50 percent;
- hyperinflation - more than 50% per year, can reach thousands or even tens of thousands of percent
There are also the following types of inflation:
- inflation is predictable, i.e. meeting the expectations of the authorities and economic entities, and unpredictable;
balanced inflation, when goods rise in price in proportion to each other, and unbalanced, in which they rise in price in different proportions;
demand and cost inflation (supply)
Demand-pull inflation occurs when there is a reduction in production, resulting in a shortage of goods, leading to higher prices. It was typical for the economy of the USSR, when the containment of prices by administrative methods led to the notorious shortage of consumer goods. "Extra" money was withdrawn from citizens mainly through the voluntary-compulsory sale of government bonds.
At present, there is mainly cost inflation, when an increase in production costs is reflected in its cost, and then in the final cost.
Causes of inflation
Economists name the following main causes of inflation:
- increase in lending individuals and companies;
- money issue as a means of covering public spending;
- for resource-based economies - changes in world prices for raw materials
a decrease in GDP with the same amount of money in circulation;
excessive monopolization of the economy, allowing giant corporations to pass on exorbitant costs to the consumer
For the government, moderate projected inflation is a way to stimulate demand, thereby positively influencing financial position business entities and tax revenues to the budget.
An effective way to curb inflation is, according to which the Central Bank of the Russian Federation and central banks other countries lend banking organizations. Lowering the rate increases lending and economic activity, but at the same time increases inflation, the increase - on the contrary.
Is inflation good or bad?
The simplest and most obvious consequences of inflation, which any citizen feels with his own pocket, are a decrease in purchasing power and, accordingly, a deterioration in well-being (if income growth lags far behind price increases).
The rise in prices is especially painful for students, state employees and pensioners - this category buys mainly food, medicines and pays for public Utilities a significant part of their income. But it is food, utilities and medicines that usually rise in price by more high percent than the official inflation figure.
Hence the widespread belief (partially true) that the authorities underestimate this indicator, and inflation is evil.
In fact, the inflation rate is the sum of the dynamics of prices for all goods. But while food, medicines, gasoline, etc. are becoming more expensive, other goods (for example, televisions, computers and other modern technology) are becoming cheaper.
Therefore, there is no unambiguous answer whether inflation is bad - everything is known in comparison. I also wrote about various factors that affect the standard of living of the population, and they should be taken into account when considering the overall picture. Life shows that deflation - lower prices - is much worse than creeping inflation, because:
- leads to an increase in unemployment;
- entails a reduction in wages;
- this deprives many borrowers of the ability to pay loans;
- reduced demand for goods, which exacerbates the plight of producers;
- investments are declining
So if we briefly formulate the answer to the question in the title, we can say:
too high is bad, because it only exacerbates the crisis, reducing budget revenues and investment attractiveness national economy;
moderate – good, especially compared to deflation
Restraining price growth by "decrees" of the government in a market economy leads to a decline in production, as well as to a deterioration in the quality of goods.
About inflation in the USSR, a few words were said above. The most grandiose inflation in Russia was recorded almost immediately after the collapse of the USSR - in 1992, amounting to 2508.8%. On January 1, 1998, the denomination of the ruble followed, when new banknotes were put into circulation - consider inflation in Russia from now on.
As you know, in August 1998 there was a default, resulting in annual inflation of 84.4% against a relatively moderate 11% in 1997. But since the beginning of the 2000s, the authorities have been heading for stability and oil prices have begun to rise, which greatly contributes to strengthening the Russian economy, reducing inflation and powerful growth in its stock market (both in rubles and in dollars, and the ruble exchange rate against the dollar for many years remains stable). In addition, there is such an undoubtedly useful tool as insurance. bank deposits- in the conditions of growing incomes of the population, banks become relatively stable, which allowed the DIA fund to continuously increase its capital for several years. In spite of this,
average inflation in Russia from 2000 to the end of 2016 (for 17 years) was 11.1% per year, i.е. according to the above classification, it went beyond the boundaries of the "creeping" area. As a result, during this time, the ruble depreciated 5.95 times and lost 83.2% of its value — i.e. almost as much as a dollar in 50 years!
It is a common misconception that inflation can be stopped by converting savings into hard currency - dollars or euros. Since the ruble is weakening against them at a distance, the idea looks logical at first glance. However, calculations show that the devaluation of the ruble does not cover inflation: for example, dollars bought at the beginning of 2000 in terms of rubles at the end of 2016 would have yielded only about 4.9% per annum, euros - 5.1%. And this means that relative to inflation, such savings over 17 years would lose in value by 54.6% and 50.8%, respectively. This, of course, is less than 83.2% for the ruble, but it is also very significant. Even if we count from 1998 (from the summer of 1998 to the end of 1999 there was a landslide devaluation of the ruble by 300%), then the profitability of dollars bought at that time by today's rubles would be about 13% per year, while inflation was 15.3%. Current state of inflation:
Inflation in the world
Since the 1980s, there has been a noticeable decline in inflation in the largest economies of the world, as a result of which the latter, together with key rates, has fallen almost to zero:
Japan, undergoing stock market in 1990, in the mid-90s, she went into the area of deflation, from which she managed to get out only in Lately. IN last years there is a situation close to deflation in Europe. As described above, for the economy, a small inflation is a necessary stimulus factor - as a result, in the United States in 2016 it was already possible to slightly increase key rate. A very similar picture of inflation can be found in another source:
Japan is not shown here, but Germany is present, also falling into the general trend. And here is the inflation picture for the main countries of the world over the past 2016:
The highest inflation is in Ukraine, and for the third year in a row. However, in 2012, it was there, paradoxically, that of all the countries shown in the picture, inflation gave the lowest values. As you can see from the picture, there are no serious reasons to believe that the world is entering an era of deflation - the vast majority of countries are still in the inflationary zone. Actual inflation for all countries of the world (country names are clickable) can be seen at https://ru.tradingeconomics.com/country-list/inflation-rate.
Hyperinflation in world history
Examples of the strongest inflation in the 20th-21st centuries:
- in Germany in 1921-23, after the defeat of the country in the First World War, inflation amounted to 16,000,000% per year by the end of the period, "paper stamps" of huge denominations and even surrogate money - notgelds - came into circulation. As far as I remember, one of Remarque's stories describes how paper money was taken by trucks to landfills - and immediately after the end of World War II, they could steal a bag, shaking money out of it;
- in Zimbabwe since 2003, after the famine and the subsequent unsuccessful agrarian reform, inflation according to official data in 2008 was 231,000,000%, but according to estimates independent experts reached 516 quintillion percent and did not stop there;
in Hungary in 1945-46, after the Second World War, inflation reached 4.19 × 1016% in July 1946 (prices doubled every 15 hours!), which led to the issuance of a banknote with a face value of 1021 pengö (the largest denomination in history money);
in Yugoslavia in 1991-94. due to the collapse of the country and civil wars, inflation reached 100,000%, and the face value of the largest banknote amounted to 500 billion dinars.
Types of inflation
As already noted, inflation is a decrease in the purchasing power of money, manifested primarily through a relatively rapid rise in prices. There are two main types of inflation: hidden and open. Both types are based on an imbalance between the value of the entire mass of goods and services in the opposing money supply.
1. Hidden inflation exists, as a rule, in market economy in which prices and wages are controlled and determined by the government. It manifests itself through a shortage of goods, through a deterioration in the quality of manufactured goods. The shortage of goods led to the fact that money ceased to fulfill its functions, so in order to buy some goods, it was not enough to have money, special coupons were also required.
2. Open inflation manifests itself mainly through the rise in prices for goods and services. Paper money depreciates, there is an excess money supply, not secured appropriate amount goods and services.
At the same time, any rise in prices cannot be regarded as inflation. On the contrary, price increases can be non-inflationary and occur under the influence of other reasons.
Types of inflation
Depending on the growth rate of inflation indicators, the following types of inflation are distinguished.
1. Creeping inflation - the rate of price growth - 10% per year. This is a moderate rise in prices, which does not have a significant negative impact on economic life. Savings remain profitable (interest income is higher than inflation), the risks of investment almost do not increase, the standard of living falls slightly.
This type of inflation is typical for countries with developed market economies.
2. Galloping inflation - the rate of price growth - up to 300-500% per year, monthly growth rates are measured in double digits. Such inflation has a negative impact on the economy: savings become unprofitable (% on deposits is below the inflation rate), long-term investments become too risky, the standard of living of the population is significantly reduced.
Such inflation is typical for countries with weak economies or countries with economies in transition.
3. Hyperinflation - a growth rate of more than 50% per month. More than ten thousand percent annually. Such inflation has a devastating effect on the economy, destroying savings, the investment mechanism, and production as a whole. Consumers are trying to get rid of "hot money", turning it into material values.
4. Causes of inflation
The main differences in the approach to the theory of inflation are in determining its causes, which are put forward as an excess of money supply over commodity, emission, discrepancy between the growth rates of labor productivity and wages, budget deficit, excess investment, excessive growth in wages and production costs, etc.
However, inflation, although it manifests itself in the growth of commodity prices, cannot be reduced to a purely monetary phenomenon. This is a complex socio-economic phenomenon, generated by disproportions in reproduction in various areas of the market economy. In general, the roots of such a phenomenon as inflation lie in the mistakes of the public policy. Usually, inflation is based on not one, but several interrelated causes, and it manifests itself not only in rising prices. The causes of inflation can be both internal and external.
External causes include, in particular, a reduction in foreign trade earnings, a negative balance of foreign trade and balance of payments. Thus, for example, the inflationary process in Russia was exacerbated by the fall in world market prices for fuel and non-ferrous metals, which are an important item of our export, as well as the unfavorable situation in the grain market in the context of significant grain imports.
Internal causes are most often hidden in the wrong financial policy of the state.
The most important reasons for inflationary price increases are:
1. Disproportion or imbalance government revenue and expenses.
This imbalance is expressed in a deficit state budget. If this deficit is financed by loans from the Central Bank of Issue of the country, that is, by printing new money, then this leads to an increase in the supply of money in circulation and, consequently, to an increase in prices.
2 . The general increase in the price level is associated with the modern economic theory with the changing market structure.
Structure modern market less and less like the structure of the market perfect competition, and largely resembles an oligopolistic one. And oligopoly has the ability to influence the price to a certain extent. Thus, oligopolists are directly interested in strengthening the "Price Race", and also, in an effort to maintain a high level of prices, they are interested in creating a shortage (reducing the production and supply of goods). Monopolists and oligopolists prevent the growth of the elasticity of the supply of goods and the connection with rising prices. Limiting the influx of new producers into the industry, the oligopoly maintains a long-term mismatch between supply and demand.
One of the most pressing problems modern world in the field of economics is the process of emission Money, which causes a disproportion in social production, leading to the depreciation of the currency. This is inflation, and it has been manifesting itself since the 20th century, accompanied by redundancy paper money and a sharp rise in commodity prices.
Inflation cannot be sudden, and its forerunners are complex phenomena that are not only economic, but also socio-political in nature. So, there is one important fact related to public expectation: if people feel the imminent approach of crisis processes and prepare for them, they will definitely come.
Since the 20th century, this phenomenon has been one of the most widespread in the world economy. Why does inflation occur, and what factors affect the overflow of money circulation channels when the need for trade is exceeded?
Inflation: essence, causes and socio-economic consequences
Inflation is a real test for the country's economy. It is not one reason that leads to its occurrence, but a whole complex of factors that depend not only on the state of production, but also on socio-political sentiments. A sign indicating an imbalance in aggregate supply and demand is the negative dynamics of prices: they do not decrease, but, on the contrary, increase, and this phenomenon is sustainable, not short-lived.
What changes accompany this process:
- disruption in the work of credit monetary system states;
- increase in the cost of goods (explicit or hidden);
- barter transactions become more frequent;
- the standard of living of the population decreases.
There is also a completely opposite process, which experts call deflation. It is characterized by a decrease in the general price level.
Main sources of inflation
- Stable deficit of the state budget with additional release of funds into circulation.
- To overflow money channels and the rise in prices leads to the export of capital abroad.
- Low ruble exchange rate, crowding out national currency foreign or dollarization.
- Creating an artificial scarcity of money.
- Use of substitutes for official forms of money or surrogates.
- Dominance in the market by one or more manufacturers, pressure on competitors in conditions of constant price control.
- Growing production costs, its deformation.
- The so-called expectation of inflation.
- The presence of a hidden or shadow economy.
- Instability of the tax system.
What does inflation depend on?
The process of depreciation of money can be accelerated due to several reasons:
- a sharp increase in the cost of oil;
- rising prices on world commodity markets;
- base effect - rapid growth associated with extremely low starting values.
Causes of inflation briefly and clearly
There are two main factors that cause a disproportion in production and an increase in the cost of goods.
- growth aggregate demand;
- decrease in aggregate supply.
Depending on the reason that caused the negative process, the phenomenon is divided: demand inflation (the onset of which was a reaction to an increase in demand) and costs (the second option) are distinguished.
An imbalance in indicators can be caused by the following factors:
- An increase in the number of public procurements.
- Growth in demand for a variety of means of production with the workload of its various industries.
- An increase in wages and an increase in the purchasing power of the population of the country.
What do these phenomena lead to? The amount of money begins to exceed the quantity of goods, demand rises sharply, and the price inexorably rises. The result of demand inflation is a shortage of supply: companies and firms cannot cope with the emerging wave of demand.
Demand inflation a) and supply b)
Supply-side inflation occurs due to a decrease in supply in the economy.
the result is the cost of production and rising prices for goods as a constant companion of this negative phenomenon. They shift the supply curve: with this type of inflation, it tends up. The balance is set later in other values that correspond to a higher price. This process limits itself: the decline in production does not allow costs to increase, since when the unemployment rate rises, wages invariably fall.
Supply inflation may also arise as a result of an increase in incomes of the population caused by pressure from trade unions.
All phenomena that contribute to the growth of inflation are divided into monetary and non-monetary.
Monetary Causes or Factors of Inflation
They are caused by the imbalance that arises between money demand and the mass of goods produced. The possible quantity of products that the buyer is able to purchase turns out to be much higher than the size of the turnover. Growing incomes (wages) of the population, and expenses are reduced, there is a budget deficit. Another characteristic phenomenon is overinvestment.
These factors include:
- unjustified release into circulation of funds;
- covering the state budget deficit.
Non-monetary reasons include
- phenomena related to the behavior of economic entities (increase in autonomous investments of firms or companies);
- changes in aggregate demand;
- militarization of the economy;
- an increase in the amount of funds issued for making payments;
- refusal of the population from the national currency in favor of a foreign one.
How to measure inflation
Inflation is measured by calculating the price index. There are several ways to calculate:
- consumer price index;
- prices of manufacturing companies;
- deflator of gross domestic product.
The following values are substituted into the formula below:
- price consumer basket(for the current year);
- the same indicator for the base year, i.e. period, which we have taken as a kind of reference point.
Another important factor is the rate of inflation. With it, we can find out the increase in prices for the year. Its calculation formula looks like this:
In it, CI0 is the price index for the previous year (for example, 2015), and CI1 is the same indicator for the current year (2016).
It should also be recalled about the division of income into nominal and real. The first is the actual amount received by the subject economic relations: it is formed from wages, interest, profit, rent, etc. the definition of the second indicator is influenced by the total amount of goods and services purchased with nominal money.
Inflation: types and consequences
This classification is based on the speed of the process. Experts highlight:
- Moderate or creeping inflation - prices rise by no more than 10% per year.
- Spasmodic or galloping - the cost of goods increases from 10-20 to 200% per year.
- If there is a steady increase in prices up to 50% per month, we are dealing with hyperinflation.
What are the consequences of this process? They are deplorable: employment in the economy is declining, savings and loans are depreciating. incomes of the population are reduced and redistributed, which leads to a decrease in purchasing power. Money is increasingly being replaced by goods: the number of barter transactions is increasing.
How to avoid the impact of inflation? Simple and accessible measures will help: control your expenses, do not forget about savings and optimal planning family budget, and an unpleasant phenomenon that is increasingly affecting Russian economy, will remain just disturbing news from the TV.
Decline in the general price level (negative growth). In the modern economy, it is rare and short-term, usually seasonal. For example, grain prices tend to decline immediately after harvest. Prolonged deflation is characteristic of very few countries. Today, the economy Japan (within −1%) can serve as an example of deflation.
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History
In the history of the world economy, there have been two cases of a sharp rise in prices associated with a drop in the value of the metals from which money was made.
- After the discovery of America, a lot of gold began to flow to European countries, and especially silver from Mexico and Peru. In the 50 years since the beginning of the 16th century, silver production has increased more than 60 times. This caused an increase in commodity prices by a factor of 2.5-4 by the end of the century.
- In the late 1840s, the development of California gold mines began. Shortly thereafter, massive gold mining began in Australia. At the same time, world gold production increased by more than 6 times, prices increased by 25-50%. Inflation of this kind has been observed all over the world.
With the increase in prices as a result of the entry into circulation of large masses of gold and silver, the emergence of a quantity theory of money is directly related, according to which an increase in the amount of money in circulation causes prices to rise. From the point of view of value theory, an increase in the money supply reflects a decrease in the value of the monetary material, which, at a constant value of commodities, is expressed in the demand for more gold or silver for an equivalent exchange. For modern economies, in which the role of money is played by obligations that have no intrinsic value (fiat money), slight inflation is considered the norm and is usually at the level of several percent per year. Inflation tends to pick up somewhat at the end of the year, when both household consumption of goods and corporate spending rise.
Features of inflation in the USSR
We economists don't know much, but we know how to create a deficit. If you want to create a shortage, for example, of tomatoes, all you have to do is pass a law that makes it impossible for retailers to sell tomatoes for more than two cents a pound. Instantly you will have a shortage of tomatoes.
Causes of inflation
In economics, the following causes of inflation are distinguished:
- An increase in government spending, to finance which the state resorts to money emission, increasing the money supply in excess of the needs of commodity circulation. It is most pronounced in war and crisis periods.
- Excessive expansion of the money supply through mass lending, and financial resource for lending is taken not from savings, but from the issue of unsecured currency.
- Monopoly large firms to determine the price and own production costs, especially in the primary industries.
- The monopoly of trade unions, which limits the ability of the market mechanism to determine the level of wages acceptable to the economy.
- A reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in prices, since a smaller volume of goods and services corresponds to the same amount of money.
- Increase state taxes and duties, excises, etc., with a stable level of money supply.
In the course of particularly strong inflation, as, for example, in Russia during the Civil War, or Germany in the 1920s. money turnover can generally give way to natural exchange.
A monetarist view of the causes of inflation and proposals for its reduction
Monetarists proceed from the fact that economic growth is determined exogenously and does not depend on the growth rate of the money supply, and the velocity of money circulation is relatively stable, therefore, given the equation
M V = P Q (\displaystyle MV=PQ),where M (\displaystyle M)- nominal money supply, V (\displaystyle V)- speed circulation of money, P (\displaystyle P)- price level, Q (\displaystyle Q)- volume of output,
we obtain that inflation (price growth rate) is equal to the money supply growth rate.
To fight inflation with monetary methods, the so-called “dear money policy” is usually proposed. The main task is to reduce the amount of money in circulation or slow down the velocity of money circulation. This can lead to:
- increase in the tax burden;
- reduction or freezing of wages;
- reduction of budget expenditures;
- reduction in lending.
Types of inflation
Uneven growth of prices by commodity groups gives rise to inequality of profit rates, stimulates the outflow of resources from one sector of the economy to another (in Russia, from industry and Agriculture in trade and the financial and banking sector).
Types of inflation:
- Demand-pull inflation - is generated by an excess of aggregate demand compared to the real volume of production (deficit of goods).
- Supply inflation (costs) - the rise in prices is caused by an increase in production costs in the context of underutilized production resources. An increase in unit costs reduces the volume of products offered by producers at the current price level.
- Balanced inflation - the prices of various goods remain unchanged relative to each other.
- Unbalanced inflation - the prices of various goods change in relation to each other in different proportions.
- Forecast inflation is inflation that is factored into the expectations and behavior of economic agents.
- Unpredictable inflation - becomes a surprise for the population, as the actual growth rate of the price level exceeds the expected one.
- Adapted consumer expectations - changing consumer psychology. Often arises from the dissemination of information about future potential inflation. The increased demand for goods allows entrepreneurs to raise the prices of these goods.
The suppression of inflation is characterized by external price stability with active government intervention. An administrative prohibition to raise prices usually leads to a growing shortage of those goods for which prices would have to rise without government intervention, not only because of the initial increased demand, but also as a result of a decrease in supply. State subsidization of the difference in prices for the producer or consumer does not reduce supply, but additionally stimulates demand.
Depending on the growth rate, there are:
- creeping(moderate) inflation(Price growth less than 10% per year). Western [ ] economists consider it as an element of the normal development of the economy, since, in their opinion, insignificant inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates the payment turnover, reduces the cost of loans, and contributes to the activation of investment activity and growth in production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. The average inflation rate in the EU countries in recent years has amounted to 3-3.5%. At the same time, there is always the danger that creeping inflation will get out of control. state control. It is especially high in countries where there are no well-established regulatory mechanisms economic activity, and the level of production is low and characterized by the presence of structural imbalances;
- Galloping inflation(annual price increase from 10 to 50%). Dangerous for the economy, requires urgent anti-inflationary measures. Predominant in developing countries;
- Hyperinflation
(prices are growing very quickly, in different sources from tens to several thousand and even tens of thousands of percent per year). It arises due to the fact that the government issues an excess amount of banknotes to cover the budget deficit. Paralyzes the economic mechanism, with it there is a transition to barter exchange. Usually occurs during war or crisis periods.
Also use the expression chronic inflation for long-term inflation. stagflation called the situation when inflation is accompanied by a decline in production (stagnation).
Agflation
Economists from investment bank"Goldman Sachs" to refer to a sharp increase in prices for agricultural products came up with a new term: "Agflation"(agricultural inflation). High rates of agflation have been recorded for two years in a row: in 2006, the Goldman Sachs food price index increased by 26 percent; in 2007 it grew by 41 percent.
Methods for measuring inflation
The most common method for measuring inflation is the Consumer Price Index (CPI), which is calculated relative to a base period.
In Russia, the Federal Service Government Statistics publishes official indices consumer prices, which characterize the rate of inflation. In addition, these indices are used as correction factors, for example, when calculating the amount of compensation, damage, and the like. If you change the calculation method, then with the same price changes in the consumer market, the results may differ significantly from the official ones. At the same time, these unofficial results cannot be taken into account in real practice; for example, they cannot be invoked in court. The most controversial point is the composition of the consumer basket both in terms of content and variability. The basket can be guided by the real structure of consumption. Then over time it should change. But any change in the composition of the basket makes the previous data incomparable with the current one. The inflation index is distorted. On the other hand, if you do not change the basket, after a while it will no longer correspond to the real structure of consumption. It will give comparable results, but will not correspond to real costs and will not reflect their real dynamics.
In addition to the consumer price index, there are other methods that allow you to calculate inflation. As a rule, several main methods are used:
- Producer price index(Producer Price Index, PPI) - reflects the cost of production without taking into account the additional distribution price and sales taxes. The PPI value is ahead of the CPI data.
- Living expenses index(Cost-of-living Index, COLI) - takes into account the balance of income growth and cost growth.
- Asset price index: shares, real estate, the price of borrowed capital, and so on. Typically, asset prices rise faster than consumer goods prices and the value of money. Therefore, the owners of assets due to inflation only get richer.
- Deflator GDP(GDP Deflator) - calculated as a change in price for groups of identical goods.
- Purchasing power parity national currency and changes in the exchange rate.
- Index Paasche- shows the ratio of current consumer spending to the cost of acquiring the same assortment set in the prices of the base period.
Inflation Models
The Friedman model proceeds from the real demand for money as a function of real income and expected inflation, and the expectations are assumed to be extremely rational, that is, equal to actual inflation. For this model, it is possible to determine the level of inflation at which real seigniorage is maximum - the so-called. optimal inflation. Ceteris paribus, this rate of inflation is the lower, the higher the rate economic growth. If actual inflation is higher than "optimal", then the additional emission of money will only accelerate inflation and may lead to negative real seigniorage. The issue of money is possible if the actual inflation is below the "optimal".
The Kagan hyperinflation model is based on the dependence of the real demand for money only on inflationary expectations, which are formed adaptively. At low values of the rate of adaptation of expectations and low elasticity of demand for money to inflation expectations, this model describes a de facto equilibrium situation when inflation is equal to the growth rate of the money supply (which is consistent with the quantity theory of money). However, at high values of these parameters, the model leads to uncontrolled hyperinflation despite constant pace money supply growth. It follows from this that in such conditions, in order to reduce the level of inflation, measures are required that reduce the inflationary expectations of economic agents.
The Bruno-Fischer model takes into account the dependence of the demand for money not only on inflationary expectations, but also on GDP, more precisely, the same function is used as in the Kagan model, but for the specific (per unit of GDP) demand for money. Thus, in this model, in addition to the money supply growth rate, a (constant) GDP growth rate appears. In addition, the model introduces a budget deficit and analyzes the impact budget deficit and ways of its financing (net emission of money or mixed financing through emission and borrowings) on inflation dynamics. Thus, the model allows to deepen the analysis of the consequences of monetary policy.
The Sargent-Wallace model also takes into account the possibility of emission and debt financing of the budget deficit, however, it proceeds from the fact that the possibilities of increasing debt are limited by the demand for government bonds. The interest rate exceeds the growth rate of output, therefore, from a certain moment, deficit financing becomes possible only due to seigniorage, which means an increase in the growth rate of the money supply and inflation. The model assumes that monetary policy unable to influence the growth rate of real output and real interest rate(they are set exogenously in the model). The main conclusion of the model, which at first glance seems paradoxical, is that a contractionary monetary policy today inevitably leads to an increase in the price level tomorrow and, moreover, it can lead to an increase in current inflation. This conclusion follows from the fact that economic agents expect that the government will have to switch from debt to emission financing in the future, and a low rate of money supply growth today means a high rate in the future, which will cause inflation. The expectation of inflation in the future may cause inflation already in the present, despite the constraint monetary policy. Thus, inflation with debt financing can be even higher than with emission financing. The only reliable means is to achieve a budget surplus.
Inflation functions
Inflation is used to redistribute national income and social wealth in favor of the initiator of the inflationary process, which in the overwhelming majority of cases is the currency emission center. Moreover, if the issue of the national currency is due to the purchase central bank foreign exchange, there is a transnational redistribution of social wealth.
Grade
According to the American economist, Nobel Prize winner in economics in 1976, Milton Friedman: "Inflation is a form of taxation that does not need legislative approval".
Some [ who?] economists believe that a small (creeping) and stable inflation has positive features. Entrepreneurs who borrowed before the price increase are easily paying off their debts and taking on new loans, expecting that the price increase will make it easier to pay back. People who keep their savings “in a jar” decide to keep them in banks in order to at least to some extent protect them from depreciation. This leads to stimulation capital investments into production.
The concept of inflation and its types;
Seniors and inflation tax;
Inflation and Unemployment: Phillips Curve;
Consequences of inflation;
government anti-inflationary policy.
The printing of money is the most difficult form of taxation to evade, and at the same time accessible to the weakest government, even if it is no longer capable of anything.
John M. Keynes, English economist
inflation as a global economic problem became most acute in the 20th century. after the rejection of the gold standard and the spread of the inflationary method of financing government spending.
In all developed countries throughout the 20th century. prices were rising. Inflation took over developing countries, many of which have experienced bursts of hyperinflation. The transition to a market economy in a number of countries at the end of the 20th century. caused strong inflationary trends in these countries. The problem of inflation has also become urgent for Russia.
All this causes an urgent need to analyze inflationary processes, as well as options implementation of anti-inflationary policy.
The concept of inflation and its types
Inflation is the increase in the general price level in the country.
In this definition, attention should be paid to the word "general". It is important to keep in mind that when we talk about inflation, we are not interested in the rise in prices of goods or services in any particular markets, namely general rise in the price level.
Inflation accompanied by depreciation monetary unit, but it is not only a monetary phenomenon. Inflation is associated with a violation of the equilibrium state on the real or on money market, with the psychological characteristics of people's behavior, with political reasons, etc., i.e. inflation should always be viewed as a fairly complex, multifactorial phenomenon.
Inflation is very different in its manifestation, the dynamics of development, so there are different types of inflation.
First of all, it is important to consider the types of inflation in terms of rates.
The inflation rate is determined by the formula:
At the same time, to determine the price level in the current and base year, use the price indices discussed in Chap. 11. The most commonly used is the GDP deflator or consumer price index.
By measuring the rate of inflation, it can be attributed to one of three varieties.
So, there are three types of inflation rates:
Moderate (rate up to 10% per year);
Galloping (rate from 10 to 200% per year);
Hyperinflation (rate over 200% per year).
Such a division is very conditional, since a specific assessment of the degree of inflation depends on the situation that is developing in the country in question. In particular, there are many criteria for hyperinflation. For example, American economist Kagan presents his criterion for hyperinflation: 13,000% per year. Therefore, it is customary to give an economic characteristic to one or another type of inflation.
Moderate (creeping) inflation - this is such an inflation in which the value of money is preserved, contracts are concluded at nominal prices, speculative expectations in the money market are low.
Galloping inflation- this is such an inflation in which money begins to lose its value, and economic agents seek to convert them into commodity values, there is an intensive indexation of income, contract prices, speculative trends and inflationary expectations are growing.
Hyperinflation- this is such inflation, when there is a "flight from money" in the economy into real values, money completely loses its value, the existing monetary system collapses. During a period of hyperinflation, the inflation rate can run into the thousands of percent.
Sometimes, to measure the degree of development of inflationary processes, they use rule of magnitude 70. It can be used to calculate how many years the price level will double. To do this, you need to divide the number 70 by the inflation rate. For example, if inflation is 10%, then the price level will double in 7 years.
This rule helps in the preparation of some macroeconomic forecasts, it makes it possible to quickly assess the degree of unwinding of inflationary trends.
In addition to dividing inflation according to its rate of development into three varieties, there are other criteria for classifying inflation.
According to the form of manifestation, inflation is divided into two types.:
open inflation;
Suppressed inflation.
Open inflation is such inflation, which is expressed in a visible increase in the price level.
Usually, data on open inflation are provided by various statistical sources; economic agents are guided by this inflation in their forecasts.
Suppressed inflation- this is a situation where prices do not formally change due to the fact that someone maintains them at a level below the market level (usually the state supports them), but inflation manifests itself in the deviation of the prices of the "shadow" sector of the economy from the official one, in the presence of a deficit, in the formation of a system of redistribution of goods, in the deterioration of the quality of goods and services.
According to the criterion of the attitude of economic agents to inflation, it can be divided into two types:
expected;
Unexpected.
Expected inflation arises when economic agents realize that the price level is growing every year with a certain dynamics.
Realizing that prices are rising, economic agents begin to include their inflationary expectations in the calculations when setting prices and wages, and thus stable inflationary expectations are formed, which are an additional incentive for the growth of the price level. Inflationary expectations, intensifying inflation, give it an inertial character.
Unexpected inflation- this is a sudden jump in prices, which is unpredictable from the point of view of economic agents.
In conditions of unexpected inflation, a situation may arise when economic entities begin to somewhat reduce their costs, hoping that this price jump is temporary, and then, as a result of a reduction in effective demand, prices will actually go down a little. It got the name the Pigou effect. However, its occurrence is possible only in countries with relatively low sustainable inflation rates, and the structure of expenditures should be dominated by such goods, the consumption of which can be postponed in time.
On the scale of the national economy, inflation expectations usually turn out to be stronger than the Pigou effect.
Inflation can also be classified according to the sources that cause it. The fact is that inflation is one of the manifestations macroeconomic instability, i.e. there is a violation of equality between supply and demand, which turns into an inequality of the form AD > AS. The question arises: why is there an excess of demand over supply? Because aggregate demand has increased, or because aggregate supply has decreased?
So there are two types of inflation:
Demand inflation;
Supply inflation.
If the causes of the imbalance are on the side of aggregate demand, such inflation is called demand inflation. It can be represented graphically (Fig. 15.1).
The graph shows that the aggregate demand curve shifts to the right in the intermediate and vertical sections, there is an increase in the general price level, which, however, in the intermediate section is accompanied by an increase in real output, i.e. Demand-pull inflation can be a positive development if only the rate of price growth is comparable to the rate of output growth. In the vertical section, inflation develops without an increase in real output.
What can cause demand-pull inflation? The same reasons that cause the aggregate demand curve to shift to the right (they were discussed in Chapter 12).
If the causes of the imbalance are on the side of aggregate supply, then such inflation is called supply-side inflation. She is also called cost inflation, cost inflation, or stagflation. Graphically, supply inflation can be represented as shown in Fig. 15.2.
The graph shows that the aggregate supply curve shifts to the left, and this shift causes prices to rise when real output decreases, i.e. supply inflation is a purely negative phenomenon.
Supply-side inflation is caused by those causes that contributed to the shift of the aggregate supply curve to the left. They have been considered in Chap. 12.
It should be noted that in the case of supply inflation, the rise in prices occurs before the growth of the money supply, which distinguishes it from demand inflation. The cost of transactions is growing, as a result of which the demand for money increases, and consequently, the state increases the amount of money supply.
In practice, both types of inflation are closely interrelated, and the economy simultaneously has causes that cause both demand-side and supply-side inflation.
Finally, when analyzing the sources of inflation, its explanation is distinguished monetary And non-monetary sources of inflation, and, accordingly, monetary and non-monetary concepts of inflation.
Monetary concepts of inflation explain inflation as a purely monetary phenomenon. Oversaturation of the economy with excess money supply is a typical manifestation of inflationary tendencies.
Non-monetary concepts of inflation consider other causes that are not directly related to money matters, namely:
- monopoly in the markets of basic goods;
Unfavorable structure of the economy (overpricing as a result of insufficient production of vital goods);
Ill-conceived government policy, etc.
Obviously, the monetary and non-monetary causes of inflation are closely interrelated, so inflation should be analyzed as a whole, trying to take into account all possible sources of its occurrence and development.