Inflation is commonly referred to as a steady increase in the prices of goods and services. This means that the same amount allows consumers to buy fewer things over time. What modern person has not encountered this situation? In this case, economists say that the purchasing power of money falls. Hidden inflation looks even more interesting. This and much will be the subject of this article.
Definition of concept
A market economy is characterized by a gradual rise in prices and the depreciation of money. To a certain extent, this contributes to the development of the national economy. However, everything is good in moderation. If money loses its real value too quickly, then this becomes a problem that the state has to deal with. And here there are different methods. They are usually divided into monetarist and Keynesian. In a market economy, inflation manifests itself openly - inform of price increases. With the administrative-command method of managing the economy, everything is not so obvious. In this case, prices do not rise, but there is a shortage of certain goods. This is hidden inflation. Sometimes it is also called depressed. In a market economy, prices are set on the basis of the law of supply and demand, but in a command economy, everything is decided by the state. Thus, it can suppress the rise in the cost of goods. This leads to the fact that demand begins to dominate supply. So there is a shortage, which over time becomes larger if the situation in production does not change. It is necessary to distinguish inflation from a sharp rise in prices. The first phenomenon is always a lengthy process, and it is not necessarily characteristic of all industries at once. The opposite process is deflation. It is associated with lower prices. In a market economy, this phenomenon is rare. It is often seasonal. For example, in summer prices for vegetables and fruits, milk and eggs often decrease, in autumn - for cereals. It is extremely rare to encounter a long period of deflation in the economies of modern countries. Hidden inflation should be considered separately. This is a much more interesting phenomenon, for which price increases are not typical at all.
Price revolutions
In world history, a sharp depreciation of money could be observed several times. This was due to the decline in the value of the metals from which they were made. For example, during the first half of the 16th century, silver production increased more than 60 times as a result ofthe discovery of America by European navigators and the subsequent development of its deposits. During that period, prices increased by an average of 3.5 times. But this is not an isolated case. At the beginning of the 19th century, the development of gold mines began in California, and then in Australia. This led to the fact that prices increased by 25-30%. And it was observed all over the world. It should be noted that the modern monetary system established in 1976-1978 is not based on the gold standard. Modern money is fiat. They have no intrinsic value. Therefore, inflation is now not associated with an increase in the supply of gold and silver. A low level of inflation is considered the norm by most modern economists. Usually it is a little more at the end of the year, which is associated with an increase in the expenditure of all economic entities. Hidden inflation is a phenomenon that occurs in countries with economies in transition. It is not typical for developed capitalist states.
Causes of inflation
As we have already found out, price increases are typical for the market way of doing business. However, what is the reason for this? Common causes of inflation are:
- Increase in government spending.
- Monetary policy of the state to expand the money supply in the economy.
- Monopoly of big business.
- Decrease in production.
- Increase in taxes and duties.
Views
From the point of view of manifestation, it is customary to distinguish between open and hiddeninflation. And if the first type is characterized by an increase in prices, then the second is not. Hidden inflation manifests itself through a trade deficit. Prices remain fairly stable in this case. However, the purchasing power of money is still falling. Usually, open inflation is characteristic of a market economy, while hidden inflation is characteristic of a command economy. However, most modern states use a mixed style of doing business. Therefore, hidden inflation can be observed in some countries. Usually, however, a shortage of goods lasts for a short period of time. This is due to the fact that today all countries are connected by a strong network of trade relations.
Types
Open inflation can proceed at different speeds. Depending on the rate of price growth, several types of this phenomenon can be distinguished. Among them:
- Moderate. The price level in this case does not exceed 10%. Most economists believe that this situation is normal and contributes to the development of the economy. If the price increase does not exceed 10% per year, then there is no need to worry about it.
- Galloping. This species is characterized by a rise in prices by hundreds of percent. Galloping inflation is an extremely dangerous phenomenon. If prices rise so quickly, governments usually take urgent action.
- Hyperinflation. In this case, prices rise at literally astronomical rates. In a year they can increase by thousands of percent. This can completely paralyze the country's economy. Economic ties between various subjects are being destroyed. As a result, society may even switch to naturalexchange, as money depreciates catastrophically every day.
Influence
The recent economic crisis has shown how fragile modern financial institutions are. Rising prices further increase the risks associated with lending and investing. Increasingly, real estate construction contracts contain provisions regarding the adjustment of rates and amounts in accordance with the level of inflation. However, rising prices can also be a positive development. This is due to the fact that it allows you to attract more money and expand production. Prices will then decrease as supply increases.
What is Hidden Inflation?
The administrative-command economy is characterized by state intervention in all areas. Government policies can cause an increase in the money supply over a long period of time or in production costs. In the first case, we can observe an increase in demand, in the second - a decrease in supply. Both options suggest that prices should rise. However, this is in a market economy. The administrative-command style of managing allows the state to establish full control over prices. Their immutability will lead to a discrepancy between the volume of supply and demand. Hidden (suppressed) inflation manifests itself precisely through the emergence of a shortage of goods. The latter can also be characteristic of a market economy. During wars or large-scale crises, the governments of capitalist countries also often intervene in the natural environment.course of events. This is manifested through the “freezing” of prices for strategically necessary goods. And then the capitalist countries may also face manifestations of hidden inflation.
Key Features
Hidden inflation manifests itself as a gap between the prices set by the state and their real values. As a result, the population may begin to accumulate funds. At first glance, it seems that money does not depreciate. However, in reality this is not the case. Producers are starting to bear more and more losses. Over time, it becomes unprofitable for them to release anything at all. The shelves become empty, because the real price of goods is much higher than the one set by the state. However, it is not enough to say that hidden inflation manifests itself in deficits. Its signs include the emergence of new varieties of products that use fewer quality ingredients, and a decrease in portions of packaged products. In the conditions of fixed prices, manufacturers are trying in every possible way to reduce the cost of production.
Consequences
In a market economy, the growth of incomes of the population or production costs leads to an increase in the price of services and goods. However, state intervention can slow down this process. Hidden inflation often has much more serious consequences in the long run than open inflation. As a result, the quality of products is declining, the organization of labor is deteriorating, and the development of the shadow economy. After the government didceases to restrain price growth, everything becomes sharply several times more expensive, which often leads to a new round of the crisis.
Hidden inflation: the example of the USSR
The Soviet Union, especially during Stalin's time, is a truly unique state. During this period, the government pursued a policy of lowering prices while increasing wages. This led to suppressed (hidden) inflation. There was a trade deficit in the country. The residents had money, but there was nothing to spend it on. The savings rate was much higher than in the Western capitalist countries. The collapse of the USSR provoked a sharp depreciation of money, which was associated with a sharp drop in the level of production and general instability in the economy. The post-Soviet republics were swept by a wave of inflation.
Forecasting and calculation
Inflation may or may not be balanced. In the first case, all prices rise proportionally. In the second, they grow unevenly for various goods and services. Often this situation is typical for a modern market economy. There are, for example, "propulsion" industries that act as a kind of engine for the development of the economy. Prices for their products often rise faster than in others. In addition, there is a distinction between predictable and unexpected inflation. The first is a planned event for which you can prepare. Often it is included in the state budget. Economic entities can focus on this level. It is sheis the key to the development of the economy, which most economists talk about. As for unpredictable inflation, it is a complete surprise. And this can become a huge problem for the development of the economy. Commodity price increases may well exceed those expected. To solve this problem, the government should take anti-inflationary measures. Their effectiveness often determines how effectively price increases will be stopped. However, you need to understand that this is not always possible. Sometimes the emergence of inflation is associated with the bursting of the financial bubble, that is, the shortsightedness of the government in the past. In this case, a whole range of measures is needed, otherwise the problem may lead to a protracted economic crisis.
