Inflation is a word that has now firmly entered the vocabulary of not only economists, but also ordinary people. And for the latter, it is associated with all their troubles and misfortunes. Inflation is open - this is when yesterday, engineer Ivan Vasilievich could afford to buy flowers for his wife on holidays, but today he is no longer. He, as before, disappears at work and receives the same salary, but prices have risen. But another option is possible. It arises with the active intervention of the state in the economy in order to maintain prices. In this case, hidden inflation is manifested. But the consequences are the same: people either have to tighten their belts, or work more in the hope of maintaining their previous standard of living. This multifaceted phenomenon, so well known to all residents of our country, which inflation in Russia literally screams about for years, will be discussed in today's article.
Concept and its essence
It is believed that open inflation, as, however, its and its hidden variety, appeared immediately with the advent of money. To prevent it, a gold standard was invented. The stability of the metal content of dollars, francs, pounds, rubles and yens was designed to provide long-term planning to government officials and ordinary workers. However, world wars gradually destroyed this connection with gold. After the approval of the Jamaican monetary system in 1971, the dollar also lost its metal content. To date, all the currencies of the world are not provided with gold. Therefore, governments can uncontrollably increase the amount of money in circulation, which is why inflationary price increases arise. Thus, measures designed to solve the short-term financial problems of the state become the cause of a disaster, 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 was widely used only after the First World War. They talked about inflation in connection with a sharp increase in the circulation of paper money. This phenomenon is characteristic not only of modernity, but also of the Russian Empire in 1769-1895, the United States 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 reasons for open inflation often lie in huge costs associated with wars and revolutions. But today this phenomenon looks much larger. It is no longer periodic, but a chronic problem not of individual regions, but of the whole world. Therefore, its definition has become much wider. Inflation is a complex socio-economic phenomenon, which is associated with an overflow of money circulation channels in excess of commodity circulation needs. And it cannot be reduced to a simple price increase. It is important that this adverse change in conjuncture be associated with inflationary causes.
Measurement methods
The main problem in assessing inflation is that prices often rise very unevenly. Moreover, there is a category of goods whose value does not change at all. Suppressed inflation is often not taken into account in statistical reports at all. 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:
- Consumer price index. This is the most commonly used metric. It helps to evaluate the cost of the basic “basket” of goods and services.
- Retail price index. When calculating this indicator, data on 25 most important food products are used.
- Cost of Living Index. This indicator characterizes the real dynamics of population spending.
- Wholesale producer price index.
- GNP deflator.
The indicator, which is calculated on the basis of an unchanged set of products, is called the Laspeyres index. His main problem is that he does not take into account the possibility of changing the product structure. The indicator, which is calculated on the basis of a changing set, is called the Paasche index. His problem is that he does not take into account a possible decline in the level of well-being of the population. To eliminate the shortcomings of both indicators, there is a 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 magnitude 70” that allows us to estimate the number of years before doubling.
Evolution of views
Almost every economic school 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 the too rapid growth of the money supply, beyond which the real expansion of production simply does not have time. However, all negative consequences are possible only in the short term. If we consider longer terms, then the money is absolutely neutral. Thus, they reject the Keynesians' main postulate that a certain rate of economic growth can be constantly maintained due to inflation. The Phillips curve is taken as the basis for this reasoning. It reflects 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 complement and continue each other.
Causes of occurrence
Open inflation means that in the economy there is a mismatch between the demand for money and the mass of goods. Such a disproportion may arise due to the deficit of the state budget, excessive investment, outstripping the growth of salaries in comparison with the level of production. Open inflation can be caused by both external and internal causes. The first include:
- Structural world crises, which are accompanied by rising prices for raw materials and oil.
- Negative balance of payments and foreign trade balance.
- An increase in the exchange of national currency by foreign banks.
The internal causes of inflation include:
- Hypertrophied development of military engineering and other sectors of heavy industry with a significant lag in the consumer sector.
- The disadvantages of the economic mechanism. This group of reasons includes the budget deficit due to the imbalance of income and expenses, the monopolization of society, unjustified increase in salaries due to the active work of trade unions, the "import" of inflation and unfavorable expectations of the population.
Also highlight the tax and political causes of inflation. The first are associated with excess fees from the state. The political reasons for inflation are due to the fact that the depreciation of money is beneficial for debtors, which is why they often lobby. Often, inflation in each case is caused by a combination of various factors. So, in 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 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 population expectations and the relationship between costs and prices. The reasons for this phenomenon have already been considered 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 invisible. The depreciation of money does not occur, so a moderate price increase of 10-12% per year is sometimes considered even useful for the economy.
- Galloping 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. Rosstat data show that this type was typical for the Russian Federation in the 1990s. A similar situation developed in this period in other countries of Eastern Europe.
- Hyperinflation. It is accompanied by an increase in prices for astronomical values (from 200 to 1000% per year, and sometimes more). If we consider all forms of open inflation, then this is the most dangerous. In this case, the deformation of the sphere of production, the money circulation system and employment occurs. The population seeks to quickly get rid of money by buying real values on it. In society, all existing social contradictions are aggravated, major political upheavals and conflicts become possible.
Suppressed inflation
Consider the second type of this negative phenomenon. We note right away that this situation is often characteristic of an administratively planned economy. Hidden inflation appears where the state is actively struggling with 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 incorrectness of the actions of the state. Instead of struggling with the internal causes that led to the negative situation, it tries to eliminate its external manifestations. Therefore, government measures to freeze prices are always unpromising in the long run.
Other species
If we ignore all the causes of inflation, we can say that it can be imbalances in demand or supply. When equilibrium is established in the market, prices rise. Demand inflation is due to 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 increased costs for firms that produce products. Its reason is an increase 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 species already listed, 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, rising prices by 3-5% per year is the key to prosperity and stability of the economy.
From the point of view of the correlation of changes in the situation on various commodity markets, there are two types of inflation:
- Balanced. In this case, prices for various 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 are growing unevenly. She is dangerous for business. The cost of raw materials is growing faster than the price of the final product. Therefore, there is a risk of loss of profitability. However, it is often impossible to forecast for the future. So, sometimes two types of inflation are separately distinguished, depending on whether it is possible to predict the manifestation of this process in a certain period in the future.
Negative consequences
It is established that normal inflation of 3-5% positively affects the development of a market economy. However, getting out of control, it becomes the cause of a number of negative phenomena. Let's consider some of them:
- Inflation enhances the social differentiation of residents of the state. It reduces opportunities for work and accumulation. People seek to get rid of money (the most liquid form of assets) by buying up real values. And the issue of securities does not always help to somehow stop this phenomenon.
- Inflation weakens the vertical and horizontal power. Uncontrolled issue of banknotes to solve urgent problems leads to an increase in public dissatisfaction with government bodies and a decrease in confidence in them.
Also, the negative consequences of inflationary processes include:
- Upset monetary system.
- Creating tensions in the financial sector.
- Clear and hidden price risk.
- The rapid spread of in-kind exchange of goods.
- Low satisfaction of population demand.
- Decreased investment due to the riskiness of these operations.
- Change in the structure and geography of income.
- The decline in living standards.
Anti-inflationary policy
The negative effects of inflation lead to the fact that governments of various countries are forced to take measures at the level of government bodies to combat this phenomenon. Anti-inflationary policy includes a whole range of stabilization, monetary and budgetary measures. Each specific situation requires the use of a separate resolution mechanism. In accordance with the OECD concept, in order to overcome inflation, it is necessary to focus on multivariate approaches. There are direct and indirect methods of dealing with this negative phenomenon. The first include:
- Distribution of loans by national authorities.
- Regulation of price levels by the state.
- Setting salary limits.
- Foreign trade regulation by national authorities.
- Establishment of the exchange rate at the state level.
Indirect methods to combat inflation include the following measures:
- Regulation of the issue of banknotes.
- Setting interest rates for commercial banks.
- Regulation of required cash reserves.
- Operations on the open securities market conducted by the Central Bank.
The choice of certain measures is made under the influence of the general economic situation. There are three main options: income policy, supply stimulation and monetary regulation.
