Inflation. Causes of its occurrence and types
What inflation is, to formulate in general is not difficult - it is the depreciation of money caused by the excess of money supply over the entire set of goods. In my blog I wrote many articles that include this concept - however, the concept of inflation is not limited to one definition. We will also try to figure out what causes the inflation rate or, for example, why the government should not freeze prices, taking care of the welfare of citizens.
It is clear that the greater the inflation rate, the faster the money depreciates. Let's look at this picture:
In total, even with relatively low inflation of 5% per year (approximately the same average inflation in the USA over the past half century), almost 40% of capital is “consumed” after 10 years, and after 50 years less than 10% of its value remains. From the mid-1930s to 2011, only a little more than 5% of the previous purchasing power remained from the dollar:
At the same time, with high inflation at 15% per year, after only 5 years, only half of their original value remains from money. Rates on bank deposits are approximately equal to inflation and may even overtake it in some years, however, over long distances inflation manages to “eat off” some of the capital from deposits.
Types and types of inflation
The most common qualification is to distinguish between types of inflation by growth rate:
- 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
The following types of inflation are also distinguished:
- forecast inflation, i.e. meeting the expectations of the authorities and economic entities, and unpredictable;
inflation is balanced when goods rise in price proportionally to each other, and unbalanced, in which they grow in price in different proportions;
inflation of demand and costs (supply)
Demand inflation occurs when production is reduced, resulting in a shortage of goods, leading to higher prices. It was characteristic of the USSR economy, when the containment of prices by administrative methods led to the notorious shortage of consumer goods. “Excess” money was withdrawn from citizens mainly through voluntary-compulsory sale of government loan bonds.
At present, there is mainly inflation of costs, when the increase in production costs affects its cost, and then the final cost.
Reasons for inflation
Economists name the following main causes of inflation:
- increase in lending to individuals and companies;
- money issue as a means of covering government spending;
- for commodity economies - changing global commodity prices
decrease in GDP with the same amount of money in circulation;
excessive monopolization of the economy, allowing giant corporations to shift exorbitant costs on the consumer
For the government, moderate projected inflation is a way to stimulate demand, thereby positively affecting the financial situation of business entities and tax revenues.
An effective way to curb inflation is through which the Central Bank of the Russian Federation and central banks of other countries lend to banking organizations. Lowering the rate increases lending and economic activity, but at the same time increases inflation, the increase is the other way around.
Is inflation good or bad?
The simplest and most obvious consequences of inflation that any citizen feels his own pocket is a decrease in purchasing power and, consequently, worsening welfare (if income growth lags far behind price increases).
The increase in prices is especially painful for students, state employees and pensioners - this category buys mainly food, medicine and utility bills with a significant part of its income. But it is precisely products, utilities and medicines that usually rise in price by a higher percentage than the official inflation figure.
Hence the widespread belief (partially fair) that the authorities underestimate this indicator, and inflation is evil.
In fact, the inflation rate consists of the dynamics of prices for all goods. But while products, medicines, gasoline, etc. are becoming more expensive, other goods (for example, televisions, computers and other modern equipment) are getting cheaper.
Therefore, there is no definite answer whether inflation is bad or not - 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 big picture. Life shows that deflation - a reduction in prices - is much worse than creeping inflation, because:
- leads to increased unemployment;
- entails a reduction in salaries;
- this deprives many borrowers of the opportunity to pay on loans;
- reduced demand for goods, which exacerbates the plight of producers;
- reduced investment
So if we briefly formulate the answer to the question in the heading, we can say:
too high - bad, because it only exacerbates the crisis, reducing budget revenues and investment attractiveness of the national economy;
moderate - good, especially compared to deflation
Containment of price growth by “decrees” of the government in a market economy leads to a decline in production, as well as to deterioration of the quality of goods.
About inflation in the USSR a few words were said above. The most ambitious inflation in Russia was recorded almost immediately after the collapse of the USSR - in 1992, amounting to 2508.8%. On January 1, 1998, the ruble was denominated, when new banknotes were put into circulation - we will consider inflation in Russia from that moment.
As you know, in August 1998 a default occurred, resulting in annual inflation of 84.4% compared to a relatively moderate 11% in 1997. But since the beginning of the 2000s, the government has taken a course towards stability and oil prices have begun to rise, which greatly contributes to strengthening the Russian economy, reducing inflation and the powerful growth of its stock market (both in rubles and in dollars, and the ruble / dollar exchange rate for many years remains stable). In addition, such an undoubtedly useful tool appears as bank deposit insurance - in the conditions of growing population incomes, banks become relatively stable, which allowed the DIA fund to continuously increase its capital for several years. Despite this,
the average inflation in Russia from 2000 to the end of 2016 (over 17 years) amounted to 11.1% per year, i.e. according to the above classification, it went beyond the boundaries of the "creeping" area. As a result, during this time, the ruble fell 5.95 times and lost 83.2% of the value - i.e. almost as much as a dollar in 50 years!
It is a common misconception that inflation can be blocked by translating savings into hard currency - dollars or euros. As the ruble weakens at a distance, the idea at first glance looks logical. However, calculations show that ruble devaluation does not block inflation: for example, dollars bought at the beginning of the 2000s translated into rubles at the end of 2016 would only yield about 4.9% per annum, euros - 5.1%. This means that with respect to inflation, such savings over the course of 17 years would have lost 54.6% and 50.8%, respectively. This, of course, is less than 83.2% of the ruble, but also very significant. Even if we count from 1998 (from the summer of 1998 to the end of 1999 there was a collapse of the ruble by 300%), then the profitability of the dollars bought at that time for today's rubles would be about 13% per year, while inflation was 15.3%. Actual inflation rate:
World inflation
Since the 1980s, the largest economies in the world have seen a marked decrease in inflation, as a result of which the latter, along with key rates, has dropped to almost zero:
Japan, having suffered in the stock market in 1990, in the mid-90s left for deflation, from which it managed to get out only recently. In recent years, a situation close to deflation has been observed in Europe. As stated above, small inflation is a necessary stimulating factor for the economy - as a result of this, in the USA in 2016 it was already possible to slightly increase the key rate. A very similar picture on inflation can be found in another source:
Japan is not shown here, but Germany is present, also falling into the general trend. But what inflationary picture for the main countries of the world came out in the past 2016:
The highest is inflation in Ukraine, and for the third year in a row. However, in 2012, it was there that, paradoxically, 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 inflation 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 most severe inflation in the 20-21 centuries:
- in Germany in 1921-23, after the defeat of the country in World War I, inflation amounted to 16,000,000% per year by the end of the period, paper stamps of enormous denomination and even surrogate money — notgelds — entered into circulation. As far as I remember, Remarque described in one of the stories how paper money was transported by truck to landfills - and right after the end of World War II they could steal a bag by shaking money from it;
- in Zimbabwe since 2003, after the famine and the subsequent unsuccessful agrarian reform, according to official figures, inflation in 2008 amounted to 231,000,000%, however, according to independent experts, it reached 516 quintillion percent and did not stop there;
in Hungary in 1945-46, after World War II, inflation reached 4.19 × 1016% in July 1946 (prices doubled every 15 hours!), which led to the issuance of banknotes in denominations of 1,021 pengyo (the largest denomination in history of 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 increase in prices. There are two main types of inflation: hidden and open. Both types are based on the imbalance between the value of the entire mass of goods and services in the opposing money supply.
1. Hidden inflation usually exists in a non-market economy, in which prices and wages are controlled and determined by the state. 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, and special coupons were required.
2. Open inflation is manifested mainly through rising prices for goods and services. Paper money depreciates, there is an excess of money supply, not provided with the appropriate amount of goods and services.
At the same time, any price increase cannot be considered 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 price increase, which does not have a significant negative impact on economic life. Savings remain profitable (interest income is higher than inflation), the risks of investing are almost not increasing, the standard of living decreases slightly.
This type of inflation is typical for countries with developed market economies.
2. Galloping inflation - the rate of price growth is 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 (% of deposits below inflation), long-term investments become too risky, the standard of living of the population is significantly reduced.
Such inflation is characteristic of countries with weak economies or countries with economies in transition.
3. Hyperinflation - a growth rate of more than 50% per month. In annual terms, more than ten thousand percent. Such inflation acts destructively on the economy, destroying savings, the investment mechanism, and production as a whole. Consumers are trying to get rid of the "hot money", turning them 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 the excess of money supply over commodity, emissions, the mismatch between the growth rates of labor productivity and wages, the budget deficit, excess investment, excessive growth in wages and production costs, etc.
However, inflation, although manifested in rising commodity prices, cannot be reduced to a purely monetary phenomenon. This is a complex socio-economic phenomenon caused by imbalances 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 state policy. Typically, inflation is not based on one, but several interrelated causes, and it manifests itself not only in price increases. The causes of inflation can be both internal and external.
External causes include, in particular, a decrease in foreign trade earnings, and a negative balance in foreign trade and balance of payments. For example, the inflation process in Russia was aggravated by the fall in prices on the world market for fuel and non-ferrous metals, which constitute an important article of our exports, as well as the unfavorable situation on the grain market in conditions of significant imports of grain.
Internal causes are most often hidden in the wrong financial policy of the state.
The most important causes of inflationary price increases are:
1. Disproportionality or imbalance in government revenues and expenditures.
This imbalance is expressed in the deficit of the state budget. If this deficit is financed by loans from the Central Issuing Bank of the country, that is, by printing new money, then this leads to an increase in the mass of money in circulation and, consequently, to an increase in prices.
2 . The general increase in the price level is associated with modern economic theory with a change in the structure of the market.
The structure of the modern market is less and less like the market structure of perfect competition, and to a large extent resembles an oligopolistic one. And oligopoly has the ability to a certain extent to influence the price. Thus, oligopolists are directly interested in strengthening the "Price Race", and also, trying to maintain a high price level, they are interested in creating a deficit (reducing production and supply of goods). Monopolists and oligopolists hinder the increase in the elasticity of the supply of goods and the connection with rising prices. Limiting the influx of new producers into the oligopoly industry supports a long-term mismatch between supply and demand.
One of the most acute problems of the modern world in the field of economics is the process of issuing money, which is caused by a disproportion in social production, which leads to the depreciation of the currency. This is inflation, and it has been manifesting itself since the 20th century, accompanied by a surplus of paper money and a sharp increase 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 that crisis processes are approaching soon and are preparing for them, they will certainly come.
Since the 20th century, this phenomenon has been one of the most widespread in the world economy. Why is inflation occurring, and what factors influence the overflow of money circulation channels when the demand for goods is exceeded?
Inflation: the nature, 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 moods. 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 stable, and not short-term.
What changes accompany this process:
- violation of the state monetary system;
- increase in the value of goods (explicit or hidden);
- barter transactions are becoming more frequent;
- living standards are declining.
There is a completely opposite process, which experts call deflation. It is distinguished by a decrease in the general price level.
The main sources of inflation
- Stable deficit of the state budget with the additional release of cash into circulation.
- Overflow of money channels and price increases are caused by the export of capital abroad.
- Low ruble exchange rate, crowding out the national foreign currency or dollarization.
- Creating an artificial shortage of money.
- The use of substitutes for official forms of money or surrogates.
- Dominance in the market of one or more manufacturers, pressure on competitors in the conditions of constant price control.
- Rising production costs, its deformation.
- The so-called expectation of inflation.
- The presence of a hidden or shadow economy.
- Instability of the tax system.
What inflation depends on
The process of depreciating money can be accelerated due to several reasons:
- a sharp increase in the cost of oil;
- price increases in global commodity markets;
- base effect - rapid growth associated with extremely low starting values.
The causes of inflation are concise and clear
There are two main factors that cause a disproportion in production and an increase in the value of goods.
- growth in aggregate demand;
- decrease in aggregate supply.
Depending on the cause of the negative process, the phenomenon is divided: they distinguish between inflation of demand (the occurrence of which was a reaction to an increase in demand) and costs (the second option).
Violation in the balance of indicators can be caused by the following factors:
- An increase in the number of public procurements.
- The growing 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 country's population.
What do these phenomena lead to? The amount of cash begins to exceed the number of goods, demand rises sharply, and the price inexorably tends to rise. The result of demand inflation is a supply shortage: companies and firms cannot cope with the emerging demand wave.
Inflation of demand a) and supply b)
Supply inflation arises from a decrease in supply in the economy.
the result is production costs and rising prices for goods as a constant companion of this negative phenomenon. They shift the supply curve: in this type of inflation, it tends to rise. The balance is set later in other values \u200b\u200bthat correspond to a higher price. This process limits itself: the decline in production does not allow costs to increase, since wages are constantly decreasing with an increase in unemployment.
Supply inflation may also arise as a result of rising incomes caused by pressure from trade unions.
All phenomena that contribute to inflation are divided into monetary and non-monetary.
Monetary reasons or factors of inflation
They are caused by an imbalance between money demand and the mass of goods produced. The possible amount of products that the buyer is able to purchase is significantly higher than the size of the turnover. Incomes (wages) of the population are growing, and expenditures are falling, and a budget deficit is arising. Another characteristic phenomenon is over-investment.
These factors include:
- unjustified release into circulation of funds;
- covering the state budget deficit.
Non-monetary reasons include
- phenomena associated with the behavior of economic entities (increase in autonomous investments of firms or companies);
- changes in aggregate demand;
- militarization of the economy;
- growth in the number of funds issued for payments;
- refusal of the population from the national currency in favor of a foreign one.
How to measure inflation
Inflation is measured by calculating a price index. There are several ways to calculate:
- consumer price index;
- prices of manufacturing companies;
- gross domestic product deflator.
The following values \u200b\u200bare substituted in the formula below:
- cost of a consumer basket (for the current year);
- the same indicator for the base year, i.e. the period that we have taken as a kind of reference point.
Another important factor is the rate of inflation. With it, we can find out the price increase for the year. His calculation formula looks like this:
In it, IC0 is the price index for the previous year (for example, 2015), and IC1 is a similar indicator of the current year (2016).
It should also be reminded of the division of income into nominal and real. The first is the actual amount received by the subject of economic relations: it is formed from wages, interest, profit, rent, etc. the determination of the second indicator is affected by the total quantity of goods and services purchased for nominal cash.
Inflation: types and consequences
This classification is based on the speed of the process. Specialists distinguish:
- Moderate or creeping inflation - prices rise by no more than 10% per year.
- Hopping 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 implications of this process? They are deplorable: employment is declining in the economy, savings and loans are devaluing. household incomes 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 effects of inflation? Simple and affordable measures will help everyone: control your expenses, not forgetting about savings and optimal planning of the family budget, and the unpleasant phenomenon, which is increasingly affecting the Russian economy, will remain just disturbing news from the TV.
Decrease in the general price level (negative growth). In the modern economy is rare and short-term, usually is seasonal in nature. For example, cereal prices are usually reduced immediately after harvest. Long-term deflation is characteristic of very few countries. Today, the Japanese economy (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 increase 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 and especially silver from Mexico and Peru began to arrive in European countries. In the 50 years since the beginning of the 16th century, silver production has increased by more than 60 times. This caused an increase in commodity prices by the end of the century 2.5-4 times.
- In the late 1840s, the development of California gold mines began. Soon after, 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 type has been observed all over the world.
The rise in prices resulting from the circulation of large masses of gold and silver is directly connected with the emergence of a quantitative theory of money, according to which an increase in the amount of money in circulation causes a rise in prices. From the point of view of the value theory, the growth of the money supply reflects a decrease in the cost of money material, which at a constant cost of goods is expressed in the demand for more gold or silver for equivalent exchange. For modern economies in which the role of money is fulfilled by obligations that have no intrinsic value (fiat money), insignificant inflation is considered the norm and is usually at a few percent per year. The inflation rate usually increases slightly at the end of the year, when both the level of consumption of goods by households and the level of expenditures of corporations increase.
Features of inflation in the USSR
We economists do not know much, but we know how to create a deficit. If you want to create a shortage of, for example, tomatoes, you just need to pass a law that retailers cannot sell tomatoes for more than two cents per pound. Instantly you will have a shortage of tomatoes.
Reasons for inflation
In economic science, the following causes of inflation are distinguished:
- The growth of government spending, for the financing of which the state is resorting to money emission, increasing the money supply in excess of the needs of commodity circulation. Most pronounced during the war and crisis periods.
- Excessive expansion of the money supply due to mass lending, and the financial resource for lending is taken not from savings, but from the issue of unsecured currency.
- The monopoly of large firms on the determination of prices and their own costs of production, especially in the commodity sectors.
- 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 amount of goods and services corresponds to the previous amount of money.
- An increase in state taxes and duties, excise taxes, etc., with a stable level of money supply.
During particularly strong inflation, such as in Russia during the Civil War, or Germany of the 1920s. monetary circulation can generally give way to in kind exchange.
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 money circulation rate is relatively stable, therefore, given the equation
M V \u003d P Q (\\ displaystyle MV \u003d PQ),where M (\\ displaystyle M) - nominal money supply, V (\\ displaystyle V) - the velocity of money, P (\\ displaystyle P) - price level, Q (\\ displaystyle Q) - volume of issue,
we get that inflation (the price growth rate) is equal to the money supply growth rate.
To combat inflation by monetary methods, the so-called “expensive money policy” is usually proposed. The main task is to reduce the amount of money in circulation or to slow down the speed of money circulation. They can lead to this:
- increase in tax burden;
- salary reduction or freezing;
- reduction in budget expenditures;
- reduction in lending.
Types of Inflation
Uneven increase in prices for product groups generates inequality in profit standards, stimulates the outflow of resources from one sector of the economy to another (in Russia from industry and agriculture to trade and the financial and banking sector).
Types of inflation:
- Demand inflation - generated by an excess of aggregate demand compared with the actual volume of production (shortage of goods).
- Supply (cost) inflation - price increases are caused by an increase in production costs in the context of underutilized production resources. Increasing costs per unit of output reduces the volume of products offered by manufacturers 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 vary in relation to each other in various proportions.
- Predicted inflation is inflation that is taken into account in the expectations and behavior of economic entities.
- Unpredictable inflation - it becomes a surprise for the population, since the actual rate of growth of the price level exceeds the expected one.
- Adapted consumer expectations - a change in consumer psychology. Often arises from the dissemination of information about future potential inflation. Increased demand for goods allows entrepreneurs to raise prices for these goods.
The suppression of inflation is characterized by external price stability with the active intervention of the state. An administrative ban on raising prices usually leads to an increasing 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 lower supply. State subsidization of price differences for producers or consumers does not reduce supply, but additionally stimulates demand.
Depending on the growth rate, there are:
- Creeping (moderate) inflation (price increase of 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) can, under certain conditions, stimulate the development of production and the modernization of its structure. Money growth accelerates payment turnover, reduces the cost of loans, promotes investment activity and production growth. The growth of production, in turn, leads to a restoration of the equilibrium between the commodity and money supply at a higher price level. The average inflation rate in EU countries in recent years has been 3-3.5%. However, there is always the danger of creeping inflation out of state control. It is especially great in countries where there are no proven mechanisms for regulating economic activity, and the level of production is low and is characterized by structural imbalances;
- Galloping inflation (annual price increase from 10 to 50%). Dangerous for the economy, requires urgent anti-inflationary measures. Prevailing in developing countries;
- Hyperinflation
(prices rise 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 excessive amount of banknotes to cover the budget deficit. The economic mechanism is paralyzed, 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 They call the situation when inflation is accompanied by a drop in production (stagnation).
Agflation
The economists at the Goldman Sachs investment bank came up with a new term to denote a sharp increase in prices for agricultural products: "Agflation" (agrarian inflation). High rates of agflation were recorded for two consecutive years: in 2006, the food price index calculated by Goldman Sachs increased by 26 percent; in 2007, its growth was 41 percent.
Methods for measuring inflation
The most common method of measuring inflation is the Consumer Price Index (CPI), which is calculated in relation to the base period.
In Russia, the Federal State Statistics Service publishes official consumer price indices that characterize 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 changes in prices in the consumer market, the results can 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 referred to in court. The most controversial issue is the composition of the consumer basket, both in terms of fullness and variability. The basket can focus on the real structure of consumption. Then with time it should change. But any change in the composition of the basket makes the previous data incompatible with the current. The inflation index is distorted. On the other hand, if you do not change the basket, after a while it will cease to 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 basic methods are used:
- Producer price index (Producer Price Index, PPI) - reflects the cost of production without taking into account the additional cost of distribution and sales taxes. PPI is ahead of CPI data.
- Living expenses index (Cost-of-living Index, COLI) - takes into account the balance of revenue growth and cost growth.
- Asset Price Index: stocks, real estate, borrowed capital prices and more. Asset prices usually rise faster than consumer prices and the value of money. Therefore, owners of assets due to inflation only get richer.
- GDP deflator (GDP Deflator) - calculated as a change in price for groups of identical goods.
- Purchasing Power Parity national currency and change in the exchange rate.
- Paasche Index - Shows the ratio of current consumer spending to the cost of acquiring the same assortment kit in the prices of the base period.
Inflation models
The Friedman model is based on real demand for money as a function of real income and expected inflation, and expectations are assumed to be extremely rational, that is, equal to actual inflation. For this model, you can determine the inflation rate at which the real seigniorage is maximum - the so-called. optimal inflation. Other things being equal, this inflation rate is lower the higher the rate of economic growth. If actual inflation is higher than “optimal”, then additional emission of money will only accelerate inflation and may lead to negative real seigniorage. Issue of money is possible if actual inflation is below the “optimal” one.
The Keygan hyperinflation model is based on the model of the dependence of real money demand only on inflationary expectations that are formed adaptively. At low values \u200b\u200bof the rate of adaptation of expectations and low elasticity of demand for money according to inflationary expectations, this model actually describes an equilibrium situation when inflation is equal to the growth rate of the money supply (which is consistent with the quantitative theory of money). However, at high values \u200b\u200bof these parameters, the model leads to uncontrolled hyperinflation despite the constant growth rate of the money supply. It follows from this that under such conditions, measures to reduce inflationary expectations of economic agents are required to reduce inflation.
The Bruno - Fisher model takes into account the dependence of demand for money not only on inflation expectations, but also on GDP, more precisely, the same function is used as in the Cagan model, but for 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 budget deficit is introduced into the model and the impact of the budget deficit and the ways of financing it (net issue of money or mixed financing from emission and borrowing) on \u200b\u200bthe dynamics of inflation is analyzed. Thus, the model allows you to deepen the analysis of the consequences of monetary policy.
The Sargent-Wallace model also takes into account the possibility of equity and debt financing of the budget deficit, however, it is assumed that the possibility of increasing debt is limited by the demand for government bonds. The interest rate exceeds the rate of output growth, so from a certain moment financing of the deficit 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 is not able to affect the growth rate of real output and the real interest rate (they are set exogenously in the model). The main conclusion of the model, which seems paradoxical at first glance, is that a restraining monetary policy today inevitably leads to an increase in price levels tomorrow and, moreover, it can lead to an increase in current inflation. This conclusion follows from the fact that economic agents expect that in the future the government will have to switch from debt financing to equity financing, and a low growth rate of the money supply 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 restraining monetary policy. Thus, inflation with debt financing can be even greater than with equity financing. The only reliable means is to achieve a budget surplus.
Inflation function
Inflation is used to redistribute national income and social wealth in favor of the initiator of the inflationary process, which in most cases is the currency emission center. Moreover, if the issue of national currency occurs due to the purchase by the central bank of foreign currency, there is a transnational redistribution of public wealth.
Rating
According to the American economist, 1976 Nobel Prize in Economics Milton Friedman: “Inflation is a form of taxation that does not require legislative approval”.
Some [ who?] economists believe that small (creeping) and stable inflation has some positive features. Entrepreneurs who took a loan before the price increase easily pay their debts and take new loans, expecting that a rise in prices will facilitate repayment. People who keep their savings “in a penny” decide to keep them in banks in order to at least to some extent protect them from depreciation. This leads to the stimulation of capital investment in production.
The concept of inflation and its types;
Seniors and inflation tax;
Inflation and unemployment: Phillips curve;
Consequences of inflation;
Government anti-inflationary policy.
Printing money is a form of taxation, the most difficult to avoid, and which is 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 began to manifest itself most acutely in the 20th century. after the rejection of the gold standard and the spread of the inflationary method of financing public spending.
In all developed countries during the XX century. prices went up. Inflation has taken hold of developing countries, many of which have experienced surges in hyperinflation. 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 become urgent for Russia as well.
All this causes an urgent need to analyze inflationary processes, as well as possible options for implementing anti-inflationary policies.
The concept of inflation and its types
Inflation- This is an 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 rising prices for goods or services in any particular market, namely commonprice level increase.
Inflation is accompanied by a depreciation of the monetary unit, but this is not only a monetary phenomenon. Inflation is associated with an imbalance in the real or money market, with psychological characteristics of human behavior, with political reasons, etc., i.e. inflation should always be considered as a rather complex, multifactorial phenomenon.
Inflation can be very different in its manifestation, development dynamics, therefore, different types of inflation are distinguished.
First of all, it is important to consider the types of inflation by pace.
The inflation rate is determined by the formula:
At the same time, price indices considered in Sec. 11. The most commonly used GDP deflator or consumer price index.
By measuring the rate of inflation, we can attribute it to one of three varieties.
So, in terms of inflation, there are three types:
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 arbitrary, since a specific assessment of the degree of inflation depends on the situation in the country in question. In particular, there are many criteria for hyperinflation. For example, the American economist Cagan presents his criterion for hyperinflation: 13,000% per year. Therefore, one or another type of inflation is usually taken to give an economic characterization.
Moderate (creeping)inflation is inflation that maintains the value of money, contracts are concluded at nominal prices, speculative expectations in the money market are low.
Galloping inflation- this is such inflation, at which money begins to lose its value, and economic agents tend to translate it into commodity values, there is an intensive indexation of income, contract prices, speculative tendencies and inflationary expectations are growing.
Hyperinflation- this is such inflation, when the economy is running away from money into real values, money completely loses its value, and the existing monetary system collapses. During a period of hyperinflation, the inflation rate can be in the thousands of percent.
Sometimes, to measure the degree of development of inflationary processes, rule of magnitude 70.With it, you can calculate how many years the price level will double. To do this, the number 70 should be divided by the inflation rate. For example, if inflation is 10%, then a doubling of the price level will occur in 7 years.
This rule helps in the preparation of some macroeconomic forecasts, makes it possible to quickly assess the degree of promotion of inflationary trends.
In addition to dividing inflation by 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 inflation that translates into a visible increase in the price level.
Typically, data on open inflation are cited by various statistical sources; economic agents are guided by this forecast in their forecasts.
Suppressed inflation- this is a situation where prices do not formally change due to the fact that someone supports them below the market level (usually they are supported by the state), but at the same time inflation is manifested 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 relationship of economic agents to inflation, it can be divided into two types:
Expected;
Unexpected.
Expected inflationarises when economic agents realize that the price level rises every year with a certain dynamics.
Understanding that prices are rising, economic agents begin to lay down their inflationary expectations in the calculations when prices and wages are formed, and thus stable inflationary expectations are formed, which are an additional incentive for price levels to rise. Inflationary expectations, increasing inflation, give it an inertial character.
Unexpected inflation- This is a sudden jump in prices, which from the point of view of economic entities is unpredictable.
Under the conditions of unexpected inflation, a situation may arise when economic entities begin to slightly reduce their expenses, hoping that this price spike is temporary, and then, as a result of the reduction in solvent demand, prices will actually drop slightly. This is called pigou effect.However, its occurrence is possible only in countries with relatively low steady inflation rates, and in the structure of expenditures such benefits should prevail, the consumption of which can be delayed in time.
On a national scale, inflationary expectations are usually 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 of macroeconomic instability, i.e. there is a violation of the equality between supply and demand, which turns into inequality of the form AD\u003e AS.The question arises: why is there an excess of demand over supply? Is it because the aggregate demand has increased, or because the 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 segment is accompanied by an increase in real output, i.e. Demand inflation can be a positive phenomenon, if only the rate of price growth is comparable with the rate of production growth. In the vertical section, inflation develops without increasing the real volume of production.
What can cause demand inflation? The same reasons that cause the shift of the aggregate demand curve to the right (they were considered in Chapter 12).
If the causes of the imbalance are on the side of the aggregate supply, then such inflation is called supply inflation. It is also called cost inflation, cost inflation,or stagflation.Graphically, inflation in supply can be represented as shown in Fig. 15.2.
The graph shows that the aggregate supply curve is shifting to the left, and this shift causes price increases with a decrease in real output, i.e. supply inflation is a purely negative phenomenon.
Supply inflation is caused by those reasons that contributed to the shift of the aggregate supply curve to the left. They were considered in chap. 12.
It should be noted that in the case of supply inflation, price increases occur earlier than the money supply growth, which distinguishes it from demand inflation. The value of transactions is growing, as a result of which the demand for money is increasing, and consequently, the state is increasing the money supply.
In practice, both types of inflation are closely interconnected, and the economy simultaneously has causes that cause both demand inflation and supply inflation.
Finally, when analyzing the sources of inflation, its explanation distinguish monetaryand non-monetarysources of inflation, and, accordingly, monetary and non-monetary concepts of inflation.
Monetary inflation conceptexplain inflation as a purely monetary phenomenon. Oversaturation of the economy with excess money supply is a typical manifestation of inflationary trends.
Non-monetary inflation conceptsconsider its other reasons that are not directly related to monetary issues, namely:
- monopolism in the markets for basic goods;
Unfavorable structure of the economy (overpricing as a result of insufficient production of vital goods);
Poor government policies, etc.
It is obvious that the monetary and non-monetary causes of inflation are closely interconnected, therefore inflation should be analyzed in a complex, trying to take into account all possible sources of its appearance and development.