What is inflation in the economy: concept, types and causes

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

What is inflation in the country's economy? To answer this question, we must first understand what a phenomenon is in a general sense. In science, inflation is understood as the inflation of something (Latin inflatio - “swelling”). In the economy, inflation is a steady process of depreciation of money associated with the formation of an excess of money supply relative to the volume of output. Most often manifested in the rise in prices for goods and services. Moreover, prices during inflation rise for most of the products, although some goods may become cheaper at the same time. This is the short answer to the question of what inflation is in the economy. The depreciation of money is manifested in a decrease in their purchasing power. In doing so, it is important to distinguish between a short episode of price increases, which is not inflation, and a long and sustained increase associated with systemic problems in the economy. The article also givesa detailed answer to the question of what inflation is in the country's economy and how it manifests itself.

The role of slow inflation

Inflation is considered an unfavorable economic process, but a slight gradual increase in prices may be a sign of an economic recovery. In most countries of the world there is some inflation and very rarely the opposite process occurs - deflation. The dollar is also gradually depreciating, although this process is very slow.

Causes of the phenomenon

The causes of inflation in the economy can be very different. Nevertheless, economists identify the most common of them:

• The increase in the money supply in the country, when the issue of banknotes increases, and the volume of production and services remains the same. Wages and other payments grow only in nominal terms and are completely (or partially) "eaten up" by rising prices.
• Collection of large companies who want to get more profit at the expense of buyers.
• Spreading mass lending.
• Depreciation of the national currency, especially against the backdrop of a large share of imported goods.
• Increase in taxes, excises, duties.
• Lack of supply with high demand.

Types of inflation

According to the rate of price increase, inflation is divided into:

• Creeping when the annual price increase does not exceed 10%. It is normal for many countries and sometimes even good for the economy.
• Rampaging inflation. With this type of price increases by 10 - 50% per year. It is typical for periods of crisis and is often observed in developing countries. Has an adverse effect on the country's economy.
• Hyperinflation. With it, prices can grow by hundreds and thousands of percent a year. associated with a huge budget deficit. At the same time, too much money is issued. For the country's economy, hyperinflation is fatal. In Russia, this type of inflation took place in the 90s of the XX century and testified to the collapse of the former Soviet economy.

Explicit and hidden

Also, "price inflation" is subdivided according to other criteria. The most significant is the division into 2 types of inflation in the economy: open and hidden. The first is the classic version, which is manifested exclusively by an increase in prices for goods and services. It is easy to track and study by statistical methods. However, the state and producers are not always interested in rising prices.

Presence of price regulation in the conditions of recession of economy cannot proceed without a trace. After all, nobody canceled the law of conservation of matter and energy. And if it is violated somewhere, it is definitely not in the economy. And if prices remain constant, and salaries and pensions do not decrease, then in the context of a decrease in production or imports of products (against a recession in the economy), or with an increase in wages against the background of a constant volume of production (with stagnation), a commodity market can easily arise.deficit. This means that theoretically a person will be able to acquire as much as his monetary savings allow, but in fact this will not be easy to do. The number of shops will be reduced, goods will be quickly sold out, queues will appear. Such a picture was observed from time to time in the USSR. It cannot be said that the economy did not grow at that time. However, it had a clear bias and focused on the military sphere and heavy industry. A large number of construction projects also affected other segments of the economy.

And what will happen if you simultaneously try to regulate both the shortage of goods and prices, that is, set a goal in such conditions to prevent either one or the other? We have seen the answer to it in recent years. A large number of fakes, low-quality goods and products, a decrease in the share of expensive brands of products in favor of cheaper and lower quality ones. Thus, either we have a shortage of goods (which was the case in the USSR), or a reduced quality of products, or an increase in their cost (as in the 90s), or mixed options (as now), or a stable, he althy, balanced economy and the absence of all these problems. It is the latter option that is the benchmark our country should strive for.

And without reducing the blatant income inequality (according to some reports, we are already in first place in the world in this indicator!), When only 5% of the population owns the main share of the capital, and the rest get pennies, it is hardly possible to improve the economy. After all, the decline in the purchasing power of the population, whichis its direct consequence, directly reflected in the income of companies producing mass-produced products. And this means that they can no longer afford to produce the volume of good quality products that they used to produce. In addition, this will not make any sense for them: it will not be bought up anyway. This, in turn, stimulates inflation associated with a decrease in product quality. Increasing taxes and fees are also contributing to price inflation.

Demand-pull inflation

This kind of price increase is due to rapidly growing demand, when production is far behind it. The result is an increase in prices, incomes and profitability of enterprises. Following the growing demand, the expansion of production begins, an increase in demand for labor and natural resources. As a result, a balance can be reached over time, and prices will normalize.

Supply inflation

In this form, demand remains unchanged, but supply falls. This can happen when a country is highly dependent on imports of raw materials, which can rise in price (for example, due to the depreciation of the national currency). This will cause an increase in the cost of production, which may provoke an increase in prices for it for the population. An increase in production costs is also possible in the event of an increase in taxes for manufacturing companies.

How inflation affects the economy

• Inflation is bad for the banking system. With it, there is a depreciation of cash reserves and securities.
• Redistribution of income of citizens: someone gets richer, butmost are poorer.
• The need for indexation of salaries and social benefits. But it cannot always cover inflation.
• Distortion of economic indicators (GDP, profitability and so on).
• Depreciation of the national currency relative to others, which reduces the economic position of the state in the world.
• The need to ramp up production quickly to fight inflation.

Thus, the impact of inflation on the economy is quite significant.

Inflation in Russia in 2018

According to Rosstat, for the first 7 months of 2018, the inflation rate in the country's economy amounted to 2.4%. The lowest values of price growth were noted for food sector products - by 1.3%. The prices for fruits and vegetables fluctuate the most. This may be due to unstable crops and short shelf life of these products. The fluctuation range reached 13.7%.

Less, but above average, price fluctuations for paid services. Here the value of price jumps is up to 3%. Significantly increased the price of gasoline this year.

Inflation forecast for the Russian economy

According to the forecasts of the Central Bank, the average level of price growth in the country in 2018 should have been from 3 to 4%. One of the reasons for the acceleration of inflation was the weakening of the ruble. The beginning of the fall in oil prices, obviously, exacerbated the situation. According to Rosstat, annual inflation as of November 12 was already 3.7%. Therefore, the figure of 4% may even be underestimated. As a result, the government's inflation forecast will be exceeded. Especially with a further drop in oil prices.

The September forecast from the Central Bank gives more plausible inflation figures in 2018 - from 3.8 to 4.2%. Based on recent data, the top number is more realistic than the bottom.

Another negative news is the decline in the forecast for GDP growth in 2018 - from 1.5 - 2% to 1.2 - 1.7%. Moreover, the practice of our country shows that GDP growth is in no way connected with an increase in household incomes, which (on average) are still declining.

In fact, inflation may turn out to be even higher, since only the largest cities of the constituent entities of the Russian Federation are taken into account when calculating it. However, in smaller settlements, inflation tends to be higher. It should also be borne in mind that for certain categories of goods, price increases can go ahead of schedule. At the same time, the inflation rate calculated based on the data of Internet users was significantly higher than the official figures.

Inflation forecast for 2019

The situation in 2019 is predicted to be even less rosy. One of the reasons will be the planned increase in VAT. According to the forecast of the Central Bank, in 2019 the price increase will be 5-5.5%. According to E. Nabiullina, it can reach 6%.

What people think about inflation in the country

Many citizens believe that the inflation rate in the country is higher than the figures given by Rosstat. Also, the population assumes that the rise in prices in 2019 will be greater than according to official data. This is evidenced by a survey conducted by the company "inFOM". So, for the next 12 months, residents predict an increase of up to 10.1%. CauseSuch negative sentiment is the depreciation of the ruble, which may be associated with a subsequent rise in prices, at least for imported products.

Another reason for negative expectations is the increase in the cost of gasoline. The upcoming increase in VAT does not inspire citizens either. As a result, expectations for inflation are rather high.

At the same time, as of the end of September, the level of inflation expectations of the population is quite stable. This was announced by Deputy Head of the monetary policy of the Central Bank A. Liping. In his opinion, if the situation in the economy does not worsen, the level of inflation expectations may decline.

Conclusion

Thus, what is inflation in the economy, we have considered. In this process, the balance between supply and demand is always disturbed. If demand outweighs, then inflation develops, and if supply outweighs deflation. Since there is rarely an excess of something in the world, and more often there is a deficit, then the phenomenon of inflation is much more common than deflation. If inflation is significant, it means that the country's economy is in an unsatisfactory state. At the same time, inflation does not always directly affect price growth, but may have a hidden character. With this option, there is a shortage on the shelves of stores, or the quality of products deteriorates sharply. At present, inflation in our country has a mixed form: rising prices are combined with a deterioration in quality and, at the same time, a shortage of higher-quality products and goods is developing. Estimating the total amount of such inflation is almost impossible.