What is inflation in simple terms?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

The question of what inflation is can be answered as follows. Inflation is an increase in the prices of goods and services that, as a rule, no longer decrease. As a result of inflation, the same set of goods and services will have a higher monetary price, and the same amount of money will be able to purchase a smaller amount of them. All this leads to such an undesirable phenomenon as the depreciation of money, and almost always causes a negative reaction from the public.

Inflation in Russia was also significant, but has dropped sharply in the last 2 years. According to Rosstat, inflation in Russia in 2017 was 2.5-2.7%.

Inflation in simple terms

The simplest definition of what inflation is is the depreciation of the buyer's money. For example, if earlier you could buy 2 packs of butter for 100 rubles, now you can only buy one for the same amount. Because of inflation, your moneybecame twice as valuable. The negative factor is that the monetary value of salaries and pensions can remain unchanged for a long time. This automatically leads to the impoverishment of citizens.

What is money inflation in the economy?

In conditions of uncontrolled market relations, inflation almost always manifests itself in its classical form - in the form of a direct increase in prices. With the intervention of federal or local authorities in pricing (combined with negative trends in the economy), there may be a shortage and / or a decrease in product quality without a noticeable increase in prices. In this case, one speaks of such a phenomenon as hidden or suppressed inflation.

Not every price increase is inflation. For example, seasonal (cyclical) growth in food prices, various price fluctuations, including short-term price spikes, are not considered inflation. They talk about it if prices rise steadily, and this increase applies to most goods and services.

What is deflation?

In contrast to inflation, a decline in the weighted average price level is called deflation. It is observed much less frequently than inflation, and on a smaller scale. Only very few countries can boast such a price trend. Among developed countries, deflation is typical for Japan.

Varieties of inflation

The following types of inflation are distinguished by the intensity of the process:

• Creeping inflation, in which prices rise by no more than 10 percent per year. Such a phenomenon in the world is considered normal andobserved in many countries. Its appearance is often associated with additional injections of money supply into the financial turnover. This leads to such positive changes as the acceleration of the payment turnover, the growth of investment activity, the increase in production and the reduction of the credit burden on enterprises. The average percentage of inflation in the EU countries in recent years ranged from 3 to 3.5%. However, if pricing is not properly regulated, there is a risk that inflation will become more aggressive.
• Rampaging inflation is characterized by an annual increase in prices in the range of 10-50%. This situation is extremely unfavorable for the economy and requires the adoption of restraining measures. This level of inflation is often seen in developing countries.
• Hyperinflation is an increase in prices from several tens to tens of thousands of percent per year. Associated with the excess issue of banknotes by the state. Typical for acute crisis periods.

If inflation persists for a long time, it is called chronic inflation. If at the same time there is a simultaneous drop in production, then this type is called stagflation. In the case of a sharp increase in prices only for food products, they speak of such a form as agflation.

According to the nature of manifestations, open and hidden inflation are distinguished. Open is a long visible rise in prices. Suppressed (or hidden) is such an inflation in which prices do not rise, but there is a shortage of goods in stores. Most often this is due to state intervention. Thanks tomoderately priced, demand for the product rises, which can cause shortages due to high purchasing power but relatively low supply. This situation was observed in the USSR. It's called demand-pull inflation.

Manufacturers can also use tricks and reduce the cost of production of their products, which will affect the deterioration of their quality. At the same time, prices for it can remain unchanged or grow at a slow pace. A similar situation is observed in modern Russia. In the USSR, this was not possible due to strict quality control of goods and the requirements for compliance with GOSTs, so demand inflation developed.

Possible consequences of inflation

• Depreciation of cash and securities.
• Decrease in accuracy and deviation from the reality of GDP, profitability, etc.
• Depreciation of the national currency of the state.

How the inflation rate is determined

For the indexation of salaries, pensions and social benefits, a coefficient that adjusts for inflation should be taken into account. The most common method for determining the inflation rate is the consumer price index, which is based on a certain base period. Such indices are published by the Federal State Statistics Service. To determine it, use the cost of the consumer basket. But other methods apply, such as:

• Producer price index. Determines the cost of obtaining products, excluding taxes.
• Dynamics of the exchange rate of the national currency relative tobasic, more stable (dollar).
• Index of living expenses. Includes definition of income and expenses.
• GDP deflator. Determines the dynamics of prices for a group of the same goods.

Asset price index, which includes stocks, real estate and more. The rise in asset prices is faster than the rise in prices for consumer goods. As a result, those who own them become richer.

Anti-inflation policy

Anti-inflationary policy is a set of measures taken by the federal authorities aimed at regulating price increases. Such policies are divided into the following types:

• Deflationary policy. It is aimed primarily at reducing the circulation of money supply. To do this, they use the tax, credit mechanism, reduce government spending. At the same time, a slowdown in economic growth is possible.
• Measures to control both prices and wages, limiting their upper limits. However, this may cause discontent in some sections of society (oligarchs, officials, deputies, etc.).

• Sometimes they resort to external loans. Such a policy was carried out in the 90s, which led to a sharp increase in state. debt and the economic crisis.
• Measures to offset the effects of inflation in the form of annual indexation of salaries and pensions. Such a policy is currently being pursued.
• Stimulating the growth of the economy and production is the most difficult, but also the most radical method of stabilizing prices.

Inflation in Russia according to dataRosstat

According to the official data of Rosstat, inflation in 2017 was only 2.5%, and according to other sources - 2.7%, which is the lowest in the recent history of the country. This level of inflation is quite close to the values typical for developed countries. In 2016, inflation was 5.4%, in 2015 - 12.9%. In 2018, according to forecasts, inflation will be 8.7%. Its decline in the last 2 years could be associated with the recovery of world prices for raw materials, the policy of the Central Bank, and, in part, with the policy of import substitution.

Can Rosstat data be considered underestimated?

Most Russian citizens estimate the inflation rate as higher than according to official statistics. Infoma survey participants believe that this could be the result of several negative factors:

• Decrease in real incomes of the population observed from 2014 to 2018 The maximum decrease was noted in 2016. True, the scale of this, according to Rosstat, was relatively small: by 0.7 in 2014, by 3.2 in 2015, by 5.9 in 2016 and by 1.4 in 2017. However, these are average numbers. The more vulnerable categories of citizens, of course, had more. With a decrease in income, a person becomes more sensitive to rising prices.
• The second reason was the increased tax burden in recent years. There are more toll roads, parking lots, fees. Some suffered more from this, some less. For some groups of citizens, the resort tax can become a negative factor during the holiday season. Also affectedruble depreciation. After a long lull, the ruble sank heavily. As a result, everything that was sold for dollars has risen sharply in price. This also created a feeling of rapid price growth.

Another reason could be uneven price increases. They not only did not increase for some goods and services, but even decreased during the crisis. On the other hand, many medicines (especially imported ones) and products have risen in price quite strongly. As a result, it has become more difficult for the population to buy them. It turns out that inflation hit the most important consumer goods and transport services for the majority of citizens, and this created a feeling of a total and strong rise in prices

Much also depends on the adopted methodology for calculating the amount of inflation.

How did hidden inflation manifest itself?

The rise in prices for food and goods is only the visible part of the iceberg, which symbolizes the current situation with inflation in the country. The decline in the quality of goods and services is an important negative trend in recent years. So, for example, buyers note a decrease in the weight of the same products (bread, milk, etc.), a deterioration in taste, the active use of cheap fats instead of dairy, more dilution of products with water, etc. All this indicates a decrease in food values and he alth benefits of the same food basket over recent years.

Low quality is typical not only for products, but also for many consumer goods. also worsenedquality of medical services. Thus, actual inflation was significantly higher than the nominal price increase, and its true scale is difficult to estimate, and may depend on the specific region.

Conclusion

Thus, official inflation in Russia is relatively low, but uneven across years and types of products. It was the most significant in 2015. In 2018, inflation may turn out to be higher due to the weakening of regulation by the Central Bank. The so-called hidden inflation plays an important role in shaping the current situation in Russia. All this, together with other negative trends, has led to a sharp deterioration in the quality of life of citizens. To the question of what inflation is, the article gave a detailed answer.