Inflation and deflation: concept, causes and consequences

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

In an unstable economic situation or crisis, people often talk about inflation and deflation. at the factory. One has only to guess what meaning different people put into the concept of inflation. Most often you hear that it is the "culprit" of almost all the troubles in the country's economy. Is that right?

What is deflation? Is this good or bad? What is better for economic development? This is what this article is to understand, where the concepts of these processes, their types, causes and consequences that make up inflation will be revealed.

Inflation. What is it?

Inflation is the process of losing the value of money, i.e., reducing their purchasing power. Simply put, if last year 100 rubles could buy 5 loaves of bread, then this year the same 100 rubles can buy only 4 loaves of the same bread.

In different periods of time, this processmay relate to different industries and different product groups. The process of inflation lies in the fact that the total amount of money in circulation and available to the population is more than they can buy goods in circulation. This leads to an increase in prices for these goods, while the income of the population remains the same. As a result, a certain amount of money can buy less and less goods over time.

Types of inflation

Economists and financial analysts identify many gradations of inflation according to various criteria. Here are some of them:

1. According to the level of regulation by the state, inflation can be hidden and open.

Hidden - there is a strict state control over the price level, resulting in a shortage of goods, because producers and importers cannot sell their goods at prices dictated by the state. As a result, people have money but nothing to buy. Under the counter, scarce goods are sold at inflated prices.

Open - there is an increase in the prices of resources used in production, resulting in an increase in the prices of manufactured goods.

2. In terms of growth rates, moderate inflation, galloping and hyperinflation are distinguished.

Moderate - price increases are not sharp, but slow (up to 10% per year), but wage growth is growing even more slowly.

Galloping – high growth rates (11-200%). Such inflation is a consequence of serious violations on the part of the monetary system. Money depreciates very quickly.

Hyperinflation is outrageoushigh rate, almost uncontrollable situation (from 201% per year). It causes extreme distrust of money, the transition to barter transactions, to the payment of wages not in cash, but in kind.

3. According to the degree of foresight, there is expected and unexpected inflation.

Expected is the projected rate of inflation based on last year's experience and prevailing assumptions in the current period.

Unexpected - higher than predicted.

4. In everyday life, inflation is also divided into official and real inflation. Official inflation is like “the average temperature in a hospital”. To calculate the difference in the price level with a one-year interval, data are taken for different sectors of the economy in all regions of the country, and then a weighted average is displayed. So it turns out that the goods and services that make up the bulk of the consumer basket (these are food, housing and communal services, education, leisure, medicine, etc.) increased in price by 20%, oil - by 2%, gas - by 3%, the price of timber fell by 7%, etc. As a result, official inflation was 4.5%. It is this value that will be taken into account when indexing wages. Real inflation is the one that is reflected in people's wallets. Based on this example, it would be 20%.

Causes of inflation

Studying and analyzing the causes of inflation is a complex economic process. As a rule, the beginning of the inflationary process is caused not by one reason, but by several at once, while one can follow from the other, as if along a chain. They may be external (consequencesactions of the state in the international arena) and internal (domestic economic processes). The main ones include:

1. Refinancing rate cut.

It is known that the Central Bank of the state lends money to credit institutions at a certain percentage. This percentage is the refinancing rate. And if the Central Bank lowers this rate, then credit organizations can give money to the population in the form of loans, also at a lower percentage. The population takes more loans, which increases the amount of money in circulation. This is an internal reason.

2. Devaluation of the national currency.

This is the process when a country's domestic national currency begins to depreciate relative to stable currencies. For a long period it is the US dollar and the euro. When the exchange rate of the ruble falls, the cost of purchasing imported goods inevitably increases, which means that their price for the consumer increases. Even if the country's domestic markets have an offer to partially replace imported goods, their price will only temporarily stay at the same level. This is due to the fact that for the production of domestic goods, imported raw materials, fuel, and components are often used. Therefore, prices for domestic goods will also rise. This is an external cause.

3. Imbalance of supply and demand in the domestic market of the state.

Excess of aggregate demand leads to the fact that production does not have time to provide supply, there is a shortage of goods, hence the price rises. Also, an excess of aggregate demand may be a consequence of a reduction inproduction of goods, and this, in turn, is a consequence of an increase in the cost of imported raw materials, and the cost increased due to the devaluation of the ruble. Thus, the external cause of inflation influenced the emergence of the internal one, and further their consequences will have a complex development.

4. Emergencies or martial law in the state.

This entails unplanned unproductive spending, irrational spending of national income. Nothing is invested in the development of production and the state, and free money in circulation increases without increasing the goods that can be bought with it.

5. State budget deficit.

If a situation arises when government spending exceeds revenue, the government, in order to cover this deficit, starts printing money or selling debt securities to banks or the public. This leads to an increase in the amount of money in circulation, while the number of goods remains unchanged.

Deflation

What is deflation? In essence, this is the opposite of inflation.

In simple terms, deflation is a decrease in the general price level of goods.

If during inflation goods and services rise in price, and the purchasing power of money falls, then during deflation, on the contrary, the prices of goods fall, and the purchasing power of money increases. That is, yesterday you could buy 4 rolls of bread for 100 rubles, and today you can buy 5 rolls for the same 100 rubles.

It would seem, so what's wrong? This is very good for the population. Most peopleand perceive deflation as a positive and highly desirable process.

Causes of deflation

1. Supply and demand imbalance.

In a he althy economic situation, demand always creates supply. If the opposite happens, then a situation arises when more goods are produced and imported than the population of the country can buy, therefore, the prices of goods are reduced.

2. Waiting position of the population.

This reason is a direct consequence of the first reason. People are in no hurry to spend money, especially on large acquisitions, because they are waiting for the price to fall further. This leads to an even greater decrease in demand against the backdrop of unchanged supply.

3. A sharp decline in working cash in the fight against inflationary processes.

In simple terms, this is deflation replacing inflation. This situation arises when too strict or excessive measures were taken by the state to keep inflation from rising. For example, suspending the growth of wages and pensions, raising taxes and the discount rate of the Central Bank, reducing spending on the public sector.

Consequences of opposite processes

It is known that there is such an opinion: inflation is a negative process, and deflation is a positive process. However, both inflation and deflation have their consequences for the economic equilibrium of the state. Their list is long, and often one consequence gives rise to another. However, they can be both negative and positive. The following are the main effects of inflation and deflation.

Consequencesinflation

Negative:

1. Depreciation of savings, loans, securities, which leads to distrust in the banking system, investment activities.
2. Money ceases to function, barter appears, speculation increases.
3. Decrease in employment.
4. Decrease in demand of the population for certain goods and services, which inevitably leads to a deterioration in living standards.
5. Devaluation of the national currency.
6. Decrease in national production.

Positive effects include stimulating economic activity and business activity, leading to economic growth. However, this is a temporary phenomenon that can only be maintained if the planned inflation rate is controlled.

Consequences of deflation

Negative:

1. Declining consumer demand, or deferred demand. When people expect even more price reductions and are in no hurry to purchase goods and services. Thus, prices fall even lower.
2. Fall in production, which is inevitable for the fall in demand. What is the point of producing a product that is not being bought.
3. Closing companies, factories that cannot "keep afloat" due to falling demand.
4. Massive increase in unemployment due to the bankruptcy of companies and downsizing of the remaining ones. Hence the fall in incomes of the population.
5. Massive outflow of investments, which further exacerbates the situation in the country's economy.
6. Many assetsdepreciate.
7. Banks stop lending to businesses and the population, or give money at a fabulously high interest rate.

It turns out a vicious circle and chaos in almost every area of economic activity, any state will need a lot of time and effort to get out of this state and balance the economy.

Positive moments can only be attributed to temporary short-term euphoria from lower prices for goods and services.

Conclusion

When comparing inflation and deflation, we can unequivocally say that the consequences of both these processes are equally negative for the economy of any state if their level exceeds the predicted controllable indicators. According to many economists, the effects of deflation are even more damaging. And it's obvious.

In the past 2017, inflation in Russia, according to official data from Rosstat, was only 2.5%, while the planned figures that were included in the budget were 4%. On the one hand, low inflation is good for the population, ordinary consumers of goods and services. Since prices rose slightly, and this theoretically did not affect the budget of the average Russian. However, from the point of view of the impact on the development of the country's economy, a low inflation rate is a signal of low economic activity, which, of course, has a negative impact on the development of the country in the current period, and without appropriate corrective measures in future periods.

As a rule, the processes of inflation and deflation can alternate with a certain frequency, the main thing is that their fluctuations do not go beyond the permissible limits and are under control.

For the successful development of the state economy, a small percentage of inflation is necessary, but only if it is at the level of the predicted positive indicator.