Economists understand by the concept of "inflation" a steady increase in the general level of prices for goods and services. This leads to a decrease in the purchasing power of consumers. But to the question of whether inflation should be fought, a hasty, obvious answer cannot be given. This is due to the fact that a certain percentage of price increases is even useful for the economy, since it allows it to “disperse” it. We will talk about this and much more in this article.
Briefly
If we talk about what inflation is, in simple terms, then we need to turn to all the things that we understand - money. What happens to them when the general price level rises? Suppose we have a salary of $ 100. If there is inflation, we will be able to buy an ever smaller set of products on it every month. Or let's look at another example. Let a pack of chewing gum in 2016 costs one American dollar. If the annual inflation rate is 2%, then in 2017 it will have to pay 1.02 dollars for it. USA. Thus, this phenomenon leads to the depreciation of the country's monetary unit.
Types
To the question of what inflation is, they answer as follows: this is a steady increase in the general price level. However, you need to understand that the statistics for this indicator is generalized and does not take into account all goods and services. Does inflation need to be fought? Before answering this question, it is necessary to understand what caused it. The following types of inflation are distinguished:
- Deflation. This is a phenomenon in the economy, which is expressed in a general fall in prices.
- Hyperinflation. This is an extremely fast price increase. It can even lead to the collapse of the national financial system. One of the famous examples of hyperinflation is associated with Germany in 1923. Then, prices rose by 2500% per month.
- Stagflation. It is a combination of high unemployment, stagnation in production and inflation. Stagflation was characteristic of industrialized countries in the 1970s, when oil prices rose.
What is the reason for the increase in the general price level?
The causes and consequences of inflation have been the subject of debate between various economic schools for many years. However, they still did not come to a consensus. However, all theories can be divided into two streams:
- Demand inflation. It is connected with the fact that there are few goods, but a lot of money in circulation. Is it necessary to fight inflation of this type? How to do it? The main way here is to increase interest rates. This will lead to a decrease in money in circulation. Demand inflation is typically found in emerging economies.
- Supply inflation. It is associated with the fact that the costs of producers increase. In this regard, they are forced to raise prices in order to maintain the rate of profitability of their business. Costs include not only spending on production resources. Supply inflation may be associated with increased taxes or salaries.
Effects
If you ask a layman on the topic, then almost everyone will answer that inflation is definitely a negative phenomenon that empties wallets and worsens the standard of living. However, in reality it affects different strata of the population differently. An important factor is whether they expect it or not. Is it necessary to fight inflation if everyone has already prepared for it? Expectations compensate for price increases. This is due to the fact that banks manage to change interest rates, and people find a higher-paying job or discuss salary increases with superiors. Serious problems arise when inflation is unexpected:
- Lenders lose money, and borrowers win. If inflation is high enough, then it may well offset the interest payable by the latter.
- Uncertainty about the future makes companies save money and not invest in development. This brings significant damage to the business and the entire national economy in the long run.
- People who have a fixed income, such as senior citizens, experience a deterioration in their standard of living due to the depreciation of money.
- If inflation in the country is greater than in others, then the goods manufactured in it become less competitive in the world market.
People often complain about rising prices, but in reality this may not be a problem. If salaries increase at the same rate or faster, then all is well. There is no need to think about how to deal with inflation if its level is 2-3%. This is an indication that the economy is growing. If inflation were not at all, then this would be an indicator of deteriorating conditions.
Statistical evaluation
Now that we have talked about what inflation is, in simple terms, let's move on to how it is measured. Statistical estimation of this phenomenon remains a difficult problem. Disputes are often fought over which goods and services to include in a representative set. After determining the “basket”, inflation is measured based on its value in the current year compared to the past. The following two indicators are used in the United States:
- Consumer price index. He estimates inflation from the point of view of the buyer. The representative set here includes food, clothing, gasoline, cars.
- Production price index. He evaluates inflation from a business perspective. This index takes into account changes in market prices for goods and services produced in the country.
Rosstat: inflation
In November 2016, prices in the Russian Federation increased by 5.8% compared to last year. This is less than expected. This indicator is estimated by Rosstat. Inflation in various groups is as follows:
- Food. The inflation rate is 5%.
- Transport - 5.4%.
- Clothing and shoes - 7.6%.
- Leisure and culture - 6%.
- Furniture and household appliances - 5.6%.
- Alcoholic beverages and tobacco products - 8.7%.
Compared with October in November, prices increased by 0.4%. The average inflation rate in Russia for the period from 1991 to 2016 is 133.5%. The highest rate was recorded in December 1992. Then it amounted to 2333.3%. The lowest is in April 2012. During this period, the inflation rate in the Russian Federation was only 3.6%.
Control and regulation
There are many ways that the state fights inflation. Conventionally, they can be divided into several groups:
- Monetary and fiscal policy methods.
- Establishing a fixed exchange rate.
- Gold standard.
- Direct regulation of salaries and prices.
- Stimulating economic growth.
- Providing subsidies and assistance to low-income groups.
Learn more about the different ways.
One of the methods to combat inflation is to link the exchange rate of the national currency to another, which is more stable. However, this leads to the fact that the price level in one country begins to depend on the situation in another state. Moreover, in this case, the central bank and the government cannot use monetary policy to regulate inflation.
This method was widely used during the Bretton Woods system. Then the currencies of most countries were pegged to the dollar. After the 1970s, states switched to a floating exchange rate. A similar situation with inflation control occurs when the national currency is tied to gold.
Another way to combat price increases is to regulate wages and prices. It was widely used in wartime. Direct control is characteristic of planned economies. In market conditions, price regulation for important product groups can only be temporary. Any state strives to increase the pace of economic growth. To do this, it invests in the development of production, infrastructure, health care and education. If the rate of economic growth corresponds to an increase in the money supply in circulation, then inflation does not occur. In conditions when the state no longer has any other way out, it begins to subsidize low-income citizens.
