Open and suppressed inflation: definition, examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Inflation is a word that today has firmly entered the lexicon not only of economists, but also of ordinary people. And for the latter, it is associated with all their troubles and misfortunes. Open inflation means that just yesterday, engineer Ivan Vasilievich could afford to buy flowers for his wife on holidays, but today he can't. He, as before, disappears at work and receives the same salary, but prices have risen. But another option is also possible. It arises when the state actively intervenes in the economy in order to keep prices down. In this case, hidden inflation appears. But the consequences are the same: people have to either tighten their belts or work harder in the hope of maintaining their previous standard of living. This multifaceted phenomenon, so well known to all the inhabitants of our country, which literally screams inflation in Russia over the years, will be discussed in today's article.

The concept and its essence

It is believed that open inflation, as well as its and its hidden variety, appeared immediately with the advent of money. To prevent it, the gold standard was invented. The stability of the metal content of dollars, francs, pounds sterling, rubles and yen was designed to provide statesmen andordinary workers the possibility of long-term planning. However, the world wars gradually destroyed this connection with gold. After the approval of the Jamaican monetary system in 1971, the dollar also lost its metallic content. To date, all the currencies of the world are not backed by gold. Therefore, governments can uncontrollably increase the amount of money in circulation, which causes inflationary price increases. Thus, measures designed to solve the short-term financial problems of the state become the cause of a catastrophe, which is extremely difficult to prevent.

The term "inflation" itself first appeared in North America during the Civil War. Already in the 19th century, it was actively used by scientists from Great Britain and France. However, this term became widespread only after the First World War. Inflation was discussed in connection with a sharp increase in the circulation of paper money. This phenomenon is typical not only for the present, but also for the Russian Empire in 1769-1895, the USA - in 1775-1783. and 1861-1865, England - at the beginning of the 19th century, France - in 1789-1791, Germany - in 1923. If you look closely at each of these events, it becomes clear that the causes of open inflation often lie in huge costs associated with wars and revolutions. But today this phenomenon looks much bigger. It is no longer of a periodic nature, but is a chronic problem not of individual regions, but of the whole world. Therefore, its definition has become much broader. Inflation is a complex socio-economic phenomenon that is associated with the overflow of channelscirculation of money in excess of the needs of commodity circulation. And it cannot be reduced to a simple increase in prices. It is important that this unfavorable change in the conjuncture be associated with inflationary causes.

Measurement methods

The main problem with estimating inflation is that prices often rise very unevenly. And there is a category of goods, the cost of which does not change at all. Suppressed inflation is often not taken into account at all in statistical reports. But there are enough problems with the assessment of the open variety of this phenomenon. There are several indices that are used to measure inflation. Among them:

• CPI. This is the most commonly used indicator. It helps estimate the cost of a basic "basket" of goods and services.
• Retail price index. This indicator uses data from 25 essential foods.
• Cost of living index. This indicator characterizes the real dynamics of household spending.
• Wholesale Producer Price Index.
• GNP deflator.

The indicator, which is calculated on the basis of a constant set of products, is called the Laspeyres index. Its main problem is that it does not take into account the possibility of changing the commodity structure. The indicator, which is calculated on the basis of a changing set, is called the Paasche index. Its problem is that it does not take into account the possible decline in the standard of living of the population. To remedy the shortcomings of bothindicators, there is the Fisher formula. This index is equal to the product of the previous two. Since open inflation is characterized by an increase in prices, there is a separate "rule of 70 value", which allows you to estimate the number of years before they double.

Evolution of views

Practically each of the economic schools has developed its own views on the problem of inflation. Often the differences lie in the causes of this negative phenomenon. Marxists believed that open inflation is characterized by a violation of the process of social production under capitalism, which manifests itself in the presence in the sphere of circulation of banknotes in excess of economic consumption. In their opinion, this problem is connected with the internal contradictions of this social system. Inflation, open to monetarists, is too rapid growth in the money supply, which simply does not keep pace with the real expansion of production. However, all negative consequences are possible only in the short term. If we consider longer periods, then money is absolutely neutral. By doing so, they reject the Keynesians' basic postulate that one can constantly maintain a certain rate of economic growth through inflation. The basis of these arguments is the Phillips curve. It displays a directly proportional relationship between unemployment and inflation. Thus, we can say that each of the economic schools has its own idea of the phenomenon under consideration. However, they are not antagonistic, but complementand continue each other.

Causes of occurrence

Open inflation means that there is a mismatch in the economy between the demand for money and the mass of commodities. Such a disproportion may arise due to the state budget deficit, excessive investment, outpacing wage growth compared to the level of production. Open inflation can be caused by both external and internal causes. The first include:

• Structural global crises accompanied by rising prices for raw materials and oil.
• Negative balance of payments and foreign trade balance.
• Increase in the exchange of national currency for foreign currency by banks.

Internal causes of inflation include:

• Hypertrophied development of military engineering and other branches of heavy industry with a significant lag in the consumer sector.
• Disadvantages of the economic mechanism. This group of reasons includes a budget deficit due to an imbalance in income and expenditure, the monopolization of society, unjustified wage increases due to the active work of trade unions, “imported” inflation and unfavorable expectations of the population.

Also highlight the tax and political causes of inflation. The first are associated with excessive fees from the state. The political causes of inflation are due to the fact that the depreciation of money is beneficial for debtors, which is why they often lobby for it. Often inflation in each case is caused by a combination of various factors. Yes, inIn Western Europe after the Second World War, it was associated with a shortage of a large number of goods, and in the USSR - with a disproportionate development of the economy.

Open-ended inflation

There are two main types of the phenomenon under consideration. Open inflation manifests itself in a market economy. It is an indispensable attribute of the economy of most countries. Open inflation mechanisms include household expectations and the relationship between costs and prices. The reasons for this phenomenon have already been discussed above. There are such types of open inflation:

• Moderate (creeping). It is characterized by a relatively small increase in prices. Signs of open inflation in this case are almost imperceptible. The depreciation of money does not occur, so a moderate price increase of 10-12% per year is sometimes considered even beneficial for the economy.
• Rampaging inflation. This form is accompanied by a rapid jump in prices - from 20 to 200% per year. It does not stimulate production, but leads to an increase in unemployment and a drop in incomes of the population. Rosstat data show that this type was typical for the Russian Federation in the 1990s. A similar situation developed during this period in other countries of Eastern Europe.
• Hyperinflation. It is accompanied by an increase in prices by astronomical values (from 200 to 1000% per year, and sometimes more). If we consider all forms of open inflation, then this one is the most dangerous. In this case, there is a deformation of the sphere of production, the system of circulation of money and employment. The population wants to quickly get rid ofmoney, having bought on them real values. All existing social contradictions are aggravated in society, major political upheavals and conflicts become possible.

Suppressed inflation

Let's consider the second type of this negative phenomenon. We note right away that such a situation is often characteristic of an administratively planned economy. Hidden inflation appears where the government is actively fighting price increases. It tries to freeze them at a certain level. Such measures cause a shortage of goods in the market. And this shows the obvious wrongness of the actions of the state. Instead of fighting the internal causes that led to the negative situation, it tries to eliminate its external manifestations. Therefore, government measures to freeze prices are always futile in the long run.

Other species

If we ignore all the causes of inflation, then we can say that it can be disproportions in supply or demand. When equilibrium is established in the market, prices rise. Demand-pull inflation is caused by excess money supply in the economy. This situation is due to the fact that the incomes of the population and enterprises are growing too fast, and the rate of increase in production cannot keep up with them. Supply inflation is associated with an increase in the costs of firms that produce products. It is caused by increases in nominal wages due to the work of trade unions and rising prices for energy and raw materials due to crop failures or natural disasters.

In addition to the already listed types, normal inflation is also distinguished. It is believed that it is a constant phenomenon, with which it makes no sense to fight. On the contrary, price growth of 3-5% per year is a guarantee of prosperity and stability of the economy.

From the point of view of correlative changes in the situation in different commodity markets, two types of inflation are distinguished:

• Balanced. In this case, the prices for different product groups remain unchanged relative to each other. This type of inflation is not terrible for business, because entrepreneurs always have the opportunity to increase the market value of their products.
• Unbalanced. In this case, prices for different groups of goods rise unevenly. It is dangerous for business. The cost of raw materials is growing faster than the price of final products. Therefore, there is a risk of loss of profitability. In this case, it is often impossible to make a forecast for the future. So, sometimes two types of inflation are distinguished separately, depending on whether it is possible to predict the manifestation of this process in a certain period in the future.

Negative Consequences

It has been established that normal inflation of 3-5% has a positive effect on the development of a market economy. However, getting out of control, it becomes the cause of a number of negative phenomena. Consider some of them:

• Inflation increases the social differentiation of the inhabitants of the state. It reduces opportunities for work and savings. People seek to get rid of money (the most liquid form of assets) by buying real values. And issuing securities doesn't always help.somehow stop this phenomenon.
• Inflation weakens the vertical and horizontal power. The uncontrolled issue of banknotes to solve urgent problems leads to an increase in public dissatisfaction with state bodies and a decrease in trust in them.

Also, the negative consequences of inflationary processes include:

• Disorder of the money circulation system.
• Creating financial tensions.
• Explicit and implicit price risk.
• The rapid spread of the barter of goods.
• Low satisfaction of public demand.
• Decrease in investment due to the riskiness of these operations.
• Change in the structure and geography of income.
• Declining living standards.

Anti-inflation policy

The negative consequences of inflation lead to the fact that the governments of various countries are forced to take measures at the level of state bodies to combat this phenomenon. Anti-inflationary policy includes a whole range of stabilization, monetary and budgetary measures. Each specific situation requires a separate resolution mechanism. In accordance with the concept of the OECD, in order to overcome inflation, it is necessary to focus on multivariate approaches. Allocate direct and indirect methods of combating this negative phenomenon. The first include:

• Distribution of loans by national authorities.
• Regulation of the price level by the state.
• Setting salary caps.
• Regulation of foreign trade by national authoritiespower.
• Setting the exchange rate at the state level.

Indirect methods to combat inflation include the following measures:

• Regulation of the issue of banknotes.
• Setting commercial bank interest rates.
• Regulation of mandatory cash reserves.
• Operations on the open securities market conducted by the Central Bank.

The choice of certain measures is made under the influence of general economic conditions. There are three main options: income policy, supply promotion and regulation of money circulation.

Domestic realities

Russian type of inflation is significantly different from foreign analogues. This is due to the fact that it was formed in the conditions of transition from an administrative-command to a market economy with high rates of price changes. Rosstat data show the following causes of inflation:

• Structural imbalances between the military-industrial complex and other industries. All processes in the economy did not meet the standards, so it took time for radical changes.
• High monopolization of the economy. Large companies themselves determine the price level, which does not correspond to the realities of a market economy.
• Militarization of the economy, a large army, a high level of development of the military-industrial complex. This has created a huge gap between the demand for consumer goods that the population needs and the actual supply of products.
• The huge scale of the state. This means that imports to Russia could notcreate a competitive environment.

If you look at how inflation arose in Russia over the years (taking into account the history of the USSR), then the first peak in modern history fell on the First World War, the Civil War that followed it and the first stage of the NEP. The amount of money in circulation in the period from 1914 to 1917 increased 84 times. This was due to the huge military spending. From 1917 to 1923, the money supply in circulation increased 200,000 times. The second stage of inflation occurred already in the Soviet era - during the period of the pre-war five-year plans and the Second World War. The third stage took place after the collapse of the USSR - in 1992-1996

Today, inflation is a global problem that affects all countries. It is due to disproportions in the development of social production. The danger of inflation lies not only in the fact that it leads to a decrease in the standard of living of the population, but also in the fact that it undermines the possibilities for regulating the economy. In modern realities, this phenomenon has ceased to be episodic, but has become a chronic disease of civilization. As for Russia, inflation here is caused by underinvestment, that is, the wrong efforts of the Ministry of Finance and the Central Bank. To combat it in domestic realities, it is necessary to support your manufacturer and introduce stricter price controls. In summary, there is nothing wrong with normal inflation, but getting it out of control can lead to huge negative consequences.