Inflation appears as a long-term process, which manifests itself in the growth of the general level of prices. As a result, monetary aggregates depreciate relative to real assets. This is the essence of this phenomenon, which depends on many factors. However, not all changes in the prices of individual goods, aggregate demand, or supply necessarily translate into or are inflation.
Inflation appears as a long-term process, which manifests itself in the growth of the general level of prices. As a result, monetary aggregates depreciate relative to real assets. This is the essence of this phenomenon, which depends on many factors. However, not all changes in the prices of individual goods, aggregate demand, or supply necessarily translate into or are inflation.
To reflect the diversity of the essence of inflation, the following definitions should be distinguished.
- Inflation is the process of depreciation of the national currency which, in turn, causes prices to rise.
- Inflation is the process of hidden redistribution of real income among economic entities and its accumulation.
- Inflation is a way of movement of the system of basic macroeconomic indicators (volumes of production, income, prices and money) towards the dynamic equilibrium of the economy as a whole.
The above definitions of inflation, which describe certain aspects of the inflationary process, however, do not fully reflect it and the complexity of systemic economic relationships.
The higher the rate of inflation, the greater its destabilizing effect on the economy and the negative consequences tend to be. The inflation rate corresponds to the growth rate of the price index, expressed as a percentage:
- with price growth rates of up to 10% per year, moderate or progressive inflation is observed. It is positioned as an inevitable, positive process, since it is necessary for the growth of the economy, reflecting the dynamics of investment, scientific and technological progress, which is expressed in the development of new technologies, the launch of new types of products, etc. .;
- with an increase in prices of up to 200% per year – galloping or “Latin”. During such inflation, periods of sharp price increases often alternate with periods of relative stability;
- with price growth of more than 200% (or 50% per month according to Kagan’s criteria) – hyperinflation. With this type of inflation, price changes can be observed every day.
It is also possible to highlight the concept of “high inflation” existing in the economic literature. According to the criterion proposed by D. Heimann and A. Lyonhufvud, the price growth rate at this level of inflation is 5-50% per month.
Such a division criterion is, in principle, conditional. To determine actual inflation, it is necessary to find out how much the existing price growth rates change the parameters of social reproduction. In general, progressive inflation does not have a serious negative impact on the economic system. The presence of galloping inflation indicates the appearance of disproportions in the structure of the economy, the state of crisis of the financial system. Hyperinflation in most cases occurs during periods of serious violations of the reproduction ratios, when the economy is close to collapse.It is generally accepted that the economy moves in cycles between stagnation – falling prices, high unemployment, low levels of economic activity and growth, and inflation – rising prices, low unemployment and high wages, rapid economic growth and increased credit. . The real economy has repeatedly experienced both high unemployment and rising commodity prices in the absence of economic growth; This phenomenon is called stagflation.
The researchers distinguish between national, regional and global inflation. At the level of an individual country, the object of analysis is the dynamics of wholesale, retail and consumer prices, the GNP deflator. Similar indicators are analyzed at the level of association of countries (EU) and the world economy as a whole.
If the economy successfully adapts to the growth rate of prices, then it is called balanced, otherwise unbalanced. In the first case, prices rise moderately and steadily. Other macroeconomic indicators are changing almost appropriately. With unbalanced inflation, commodity prices rise at different times and the economy does not have time to adjust to changing conditions.
Monetarists consider inflation to be a purely monetary phenomenon. Any increase in the amount of money and/or in the rate of its turnover above the growth of the GNP according to this concept will cause inflation.
The increase in the money supply in circulation can be caused by several reasons: the expansionist financial policy of the State; cover the budget deficit with the help of the “printing”; strong credit expansion; growth in the use of the population’s debt obligations as a means of payment. So the culprit of inflation is the credit and banking system, which exercises inefficient control over monetary aggregates. This form of development of the inflationary process is typical of “classical” inflation of the era of pre-monopoly capitalism.
The methods to regulate this type of inflation can be:
- strict monetary policy, limiting the supply of money in circulation, raising interest rates;
- legislative limitation of wages;
- minimize the participation of state property and reduce the economic activity of the state;
- reduction of public spending and the budget deficit, which can become a source of additional demand;
- tightening of fiscal policy.
Within the framework of the Keynesian approach, “demand inflation” and “cost-driven inflation” can be distinguished as two interrelated components of the inflationary process.
demand inflation. The source of demand inflation is an increase in the solvency of demand for goods compared to their previous value. If such a process occurs for most types of goods for a long time, inflationary processes arise, i.e. Demand-driven inflation means an imbalance between aggregate demand and aggregate supply on the demand side.
It should be noted that the anti-inflationary policy in case of demand inflation largely coincides with the anti-inflationary methods of monetarist theory.
cost inflation. The source of cost-driven inflation can be an increase in production costs, which can be due to both external reasons (an increase in the cost of imports) and internal reasons (an increase in material costs).
An increase in production costs leads to a shift in the supply curve. In this case, the new equilibrium price will also be higher than the old one. A general increase in prices increases the cost of production in nominal terms, which will lead to a further shift in the supply curve.
Unlike demand-driven inflation, cost-driven inflation is characterized by a reduction in the volume of products sold along with an increase in prices. The decrease in production volume can lead to an increase in the cost of production due to overhead and other fixed cost components.
Let us briefly list the following main socioeconomic consequences of inflation, which are very diverse, contradictory and depend on the type of inflationary process:
- the real income of the population is declining;
- uneven price growth;
- the redistribution of national income among the population strata intensifies due to the incompleteness of inflation forecasts;
- there is a redistribution of income in favor of the State due to its monopoly over the process of issuing currency (seigniorage);
- additional state revenue is formed, drawn mainly from the private sector, due to the impact of inflation on taxes;
- there is an increase in the degree of uncertainty and risk of carrying out any economic activity;
- in the foreign market, the competitiveness of national goods grows with the increase in inflation;
- inflation is an unauthorized state tax;
- with moderate inflation, incentives are created for internal economic growth (according to Keynesian theory);
- rampant inflation and hyperinflation give rise to socio-political problems: the political stability of society is undermined, social tension grows.
In the real economy, there are monetary and non-monetary causes of an increase in the general level of prices. In the economic literature, methods to combat inflation are also often divided into direct and indirect.
Direct methods are direct regulation of the money supply by the state; state regulation of prices; state regulation of wages; State regulation of foreign economic activity and the exchange rate.
Indirect methods include regulation of the total amount of money by the central bank; regulation by the central bank of a series of financial processes of commercial banks; central bank operations in the open stock market.
Keynesian theory offers the following approaches as methods to regulate the inflationary process:
- income policy (direct control or setting targets for wage and price increases);
- liberalization of monetary policy;
- participation of public authorities in structural economic transformations and formation of market infrastructure;
- state regulation of foreign trade and the foreign exchange market;
- development of production (reduction of production costs that determine the cost of production).
