Creeping inflation - what is it? What happens during creeping inflation?

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

What associations do people have when they hear the word "inflation"? Usually these are only negative emotions. Inflation, as you know, entails an increase in prices for goods and services and, as a result, a reduction in the purchasing power of the population. What does a person think if he hears that inflation can be useful for society and the development of the state as a whole? Most likely he will laugh at such words. But in vain. One should correctly understand the meaning of the term "inflation", as well as distinguish between the types of this economic phenomenon.

What is inflation

Inflation (translated from English inflation) is a situation in a country when the channels of money circulation are overflowing with payment signs, due to which there is an increase in prices for goods and services, and as a result, a decrease in the solvency of the population.

In economic theory, the term "inflation" appeared in the XX century, but the phenomenon of depreciation of money was observed earlier, for example, during the war. But not every price increase should be called inflation. A seasonal increase in the cost of certain goods or services is a completely normal situation in a market economy. It is important to remember that inflation is primarily a long-term process, and not a one-time phenomenon. Inflation is subject to all countries of the world that exist in a market economy. But is it bad? Not always. You need to be able to distinguish between types of inflation and their impact on society.

What types of inflation are there

Inflation can be completely different in terms of development dynamics, causes and form of manifestation. First of all, it is very important to evaluate inflation by the pace of development:

• moderate;
• galloping;
• hyperinflation.

Crawling inflation is characterized by a moderate increase in prices: up to 10% per year. In this type of inflation, the value of money is preserved, and business transactions are made at nominal prices.

Rampaging inflation is accompanied by price fluctuations: 10-2000% per year. In such a situation, contracts are signed taking into account changes in the price level, the population invests in currency or material values. The government is carrying out many reforms, there is a difficult economic situation, which, as a rule, leads to a protracted crisis.

Hyperinflation is the most dangerous phenomenon for the country. Price growth is more than 50% per month. Economic relations are destroyed, enterprises are closed, unemployment is growing. Money has no value, people are switching to commodity exchange (barter). Even the most affluent segments of the population find themselves in a difficult situation, business and entrepreneurship is collapsing. The situation calls for government action.emergency measures.

7 causes of inflation

Experts in economic theory have identified seven main causes of the depreciation of the money supply:

• Wrong economic policy of the state, in which "the printing press is turned on", i.e., there is an issue of banknotes in excess of the required amount. Such money is not backed by the country's gold reserves and is depreciated. Especially often this situation is observed during the war.
• Mass lending to the population, resulting in more money in circulation than goods.

• Monopoly of large organizations to set prices.
• Union monopoly on wage fixing.
• Decrease in production, due to which the amount of money in circulation remains the same, and the volume of goods produced is significantly reduced.
• Depreciation of the national currency (depreciation).
• Increase in state duties and taxes.

What is observed during creeping inflation

Moderate (creeping) inflation is a completely normal process for the country's economy. A constant and uniform rise in the price level has a positive effect on the economic processes of production. Experts are sure that creeping inflation is necessary for each country. For example, technologies are being improved, thanks to which the manufacturer is able to produce more functional models, unlike their counterparts. But such product improvement requirescertain costs, which affect the increase in the price level of the final product. However, the buyer has a choice: to purchase expensive products with distinctive features or save money and choose a budget analogue.

Creeping inflation is an increase in the price level by no more than 10% per year. This phenomenon does not affect the quality of life of the population and does not reduce the purchasing power of consumers. Most often, employers increase wages, so that a slight increase in prices does not hurt the buyer. But for enterprises and private businesses, a gradual increase in prices is essential for successful further development.

Negative aspects of inflation

Inflation entails a decrease in the purchasing power of the population and a reduction in production. The increase in the price level far outstrips the increase in wages. The segment of the population that has income from the state budget suffers: pensioners, orphans, students.

The quality of services and goods is deteriorating, queues are growing, the black market and shadow business are flourishing. Lenders and budgetary organizations, as well as depositors, suffer losses. When the inflation rate becomes higher than the bank interest rate, the money invested in the deposit starts to work "in the red".

What good is inflation

In the process of inflation, the market value of housing increases, which encourages market participants to invest inconstruction and real estate. Creeping inflation is a gradual increase in prices (no more than 10% per year), which forces consumers to make a purchase immediately, without saving money "under the pillow", and also contributes to the development of production and product improvement. Enterprises invest in various industries and projects, which has a positive effect on the country's economy as a whole.

In addition, the decrease in purchasing power has a positive effect on debtors. If you do not take into account the accrued interest, then inflation "lightens" the debt burden. The borrower borrowed a certain amount of money, but after a certain time, the purchasing power of the same amount decreased, making it easier to repay it.

Briefly about the main things

Inflation entails a decrease in the purchasing power of money and there are three types of development rates: moderate, galloping and hyperinflation. It is difficult to say whether inflation brings benefits or only losses from it. If this is creeping inflation, then it is impossible to give a definite answer. This phenomenon contributes to the development of production and encourages consumers to actively use money. Other types of inflation (galloping and hyperinflation) are dangerous for the country and can lead to a prolonged economic crisis.