Inflation is a process that characterizes most modern economies. But in some states its pace is modest, in others - very noticeable. With what it can be connected? What are the reasons for this economic phenomenon?
The essence of inflation
By inflation is meant an increase in the average price level for the most popular goods and services that are supplied by state enterprises. With the continuing volume of disposable incomes of the population, inflation can reduce their purchasing power.
The economic phenomenon under consideration is the norm for most modern national economies. The fact that inflation is observed in the country usually indicates a steady demand for goods and services. With its absence or insufficient intensity, the opposite phenomenon can be observed - deflation. It is also considered the norm in modern market economies.
It is worth noting that in both cases, when inflation and deflation are considered as natural phenomena for economic systems, we are talking about the expression of the corresponding indicators in relatively small quantities - of the order of several percent. If inflation or deflation is several tens of percent, then the country's economy is likely to have significant problems. In this case, both parameters are indicators of crisis trends in the state economy.
Now consider the types, causes and consequences of inflation.
Classification of Varieties of Inflation: Price Rates
There are a fairly large number of approaches to the classification of the economic phenomenon under consideration. So, the criterion according to which the types of inflation (consequences and causes - in relation to them) is determined based on its rate is widespread. So, there is inflation:
- low;
- moderate;
- galloping;
- hyperinflation.
Low inflation refers to rising prices for popular goods and services, expressed in several percent. The reasons for this economic phenomenon are stable population incomes, which form a demand that slightly exceeds supply. The consequences of this inflation for the economy are rather positive: with stable demand, suppliers of goods and services are actively involved, new businesses are opening up, and the state economy is developing successfully.
With moderate inflation, prices rise by about 5-10% per year. As in the case of the first kind of economic phenomenon under consideration, the corresponding indicators practically do not negatively affect the state economy and, again, reflect the excess of demand over supply due to the stable income of the country's population.
With galloping inflation, prices rise by several tens of percent per year. The reasons for this economic phenomenon are a decrease in supply on the market due to a decline in the production of goods and services, a decrease in the level of capitalization in the economy, the redistribution of capital from the real sector to the financial sector, or even their withdrawal from the state’s jurisdiction.
The consequences of galloping inflation are, as a rule, the depreciation of incomes of the population (due to the fact that wages do not have time to be indexed after rising prices), the decrease in the number of jobs due to the departure of various enterprises from the market. The state is obliged to respond to a similar state of affairs in the economy, to carry out the necessary reforms. Otherwise, galloping inflation can develop into an uncontrolled price increase - hyperinflation, expressed in hundreds of percent per year. In this situation, a large-scale social and political crisis may arise in the state.
Open and closed inflation
There is another criterion that allows us to distinguish various types of inflation (consequences and causes - similarly): the degree of openness. So, experts distinguish open and hidden inflation.
The economic phenomenon of the first type is observed only if the state has a market system, characterized by a free pricing mechanism for basic goods and services. The authorities, therefore, do not interfere in the way suppliers determine the value of products and services sold to citizens. In this case, the essence of the factors influencing inflation will be obvious to the main subjects of economic relations. In addition, it will be easier for the state to manage the economy.
Hidden inflation, in turn, occurs when prices for a significant part of the goods and services supplied by enterprises are set administratively by the economic authorities. In this case, a shortage of popular types of products and services may occur, as a result of which their prices may rise unofficially, in fact. A shadow market is being formed from which taxes are not paid, which is not taken into account when determining key macroeconomic indicators of the state, such as GDP. Hence, underfunding of the national market, low capitalization of the most important sectors, and as a result, low rates of economic development.
Demand and cost inflation
Another criterion that allows you to determine certain types of inflation (consequences and causes, of course, also) - production factors. According to it, price increases can be caused by inflation of demand or costs.
The essence of the first economic process is that demand exceeds supply. This may be due to an increase in the income of the state’s population with insufficient dynamics in opening new enterprises, and ways to satisfy demand. As a result, the corresponding types of businesses open, the country's economy is growing.
Demand inflation can also be triggered by increased budgetary injections of capital in certain sectors of the economy. For example - in education, public service, the provision of social services, medicine, the army. State institutions that received budget funds also form a demand that cannot always be satisfied with the existing fixed assets of enterprises operating in the country.
Cost inflation is caused by the increase in prices for products or services, which occurs as a result of higher costs for enterprises supplying goods and services to customers. Factors of price increases in this case can be very different. Among the possible reasons - the rise in price of imported raw materials and components. Enterprises that are forced to raise prices may face a lack of demand for goods sold, as buyers may not be ready to pay for goods with increased value. As a result, firms have to curtail production due to the lack of sufficient speed.
Thus, demand inflation affects the state economy mainly positively, costs negatively. Again, the dynamics of price increases matters. As we noted above, low or moderate inflation, as a rule, indicates positive processes in the economy, galloping - negative.
The various classification criteria of the economic phenomenon in question are thus useful to compare. The criteria we are considering, which allow us to determine the different types of inflation, the consequences and causes of each of them, are closely related: the increase in prices for goods in the state economy can be due to different factors at the same time, which, at the same time, determine different criteria for classifying inflation. In addition, the one in question involves the identification of very dissimilar economic trends. Still, the causes of inflation in demand and costs are quite different. As well as their consequences.
Price Spread Inflation
The next criterion for classifying inflation types (types), its consequences and causes is the degree of variation in price indicators.
Thus, specialists identify balanced inflation, in which the cost of the most popular categories of goods grows relatively evenly. For example, if apples rise in price by 3.7%, then pears - by 4%. If rice prices rise, for example, by 8.4%, then the increase in prices for hercules can be about 9%. There is unbalanced inflation, in which there is, in turn, a noticeable imbalance in the rise in prices of goods.
The reasons for the first economic phenomenon reflect the natural decline in the purchasing power of national capital in the economy as a whole. The second type of inflation is related to the fact that sellers experience difficulties in accessing one or another supplier. As a result, a deficit appears, prices are rising. Another possible reason for unbalanced inflation is the rise in import prices as a result of changes in the national currency. This trend can have tangible social consequences if the share of imported goods in the country is significant. Their increased cost if the salaries of citizens do not grow proportionately will significantly increase the payment burden on the consumer.
In turn, balanced inflation usually does not imply social consequences. As a rule, a uniform increase in prices, firstly, is compensated by an increase in the salaries of citizens, and secondly, it is easier for the consumer to control their expenses, since he can be sure that there will be no sharp jumps in prices for popular goods.
Expectation inflation
The next criterion to distinguish the types, causes and consequences of inflation is the degree of its expectation. So, price increases in the economy can be sharp, unpredictable. As a rule, this is due to a shortage of supply in the goods market, speculative reasons, or the acquisition by some suppliers of a monopoly position in their segment. If there are no such factors, then inflation can form at a more moderate rate that can be predicted.
Inflation factors
So, we have studied the main types, causes and consequences of inflation. The outline of our article can be supplemented with a block that reveals in more detail the factors that determine inflation. Experts distinguish their following groups:
- monetary;
- structural;
- external.
Monetary factors of inflation include:
- imbalance between supply and demand (or commodity mass);
- a significant excess of citizens' income over consumer spending;
- imbalance in the state budget;
- The expressed priority of military spending;
- Ineffective investment in key sectors of the economy;
- excessively high dynamics of cash turnover;
- salary growth that does not correlate with labor productivity.
The structural factors of inflation include:
- imbalance in the structure of the economy (for example, too strong a bias in the raw materials industry and a lack of supply in the consumer sector);
- unreasonable containment of increased consumption dynamics;
- the presence of a large number of monopolies in the economy of the state.
External factors of inflation include:
- volatility of world prices for key goods, raw materials, fuel;
- a significant excess of imports over exports;
- supply shortages in the external credit borrowing market.
Inflation factors can also be political instability, errors in the tax and social policies of the state. Their influence is enhanced if they affect economic processes simultaneously.
We can examine in more detail the specifics of such a phenomenon as inflation, the nature, types, causes and consequences of it, considering the effect of price increases on the socio-economic development of the state.
Influence of inflation on the socio-economic development of the state
Inflation, as we noted above, can be characterized by relatively small indicators - a few percent, and very impressive figures.
In the first case, its influence reflects rather positive economic processes: the excess of demand over supply due to the growth of citizens' incomes, a balanced economy, and good export-import ratios. But excessively high inflation can affect socio-economic processes negatively.
If prices in the state are rising, then established business relationships can be broken between business entities (due to the fact that consumers are constantly looking for cheaper suppliers), investment is reduced (due to the fact that investments may not pay back due to price increases), there is social tension (the population may not have enough income to purchase basic goods that have increased in price).
High inflation determines:
- depreciation of bank savings of citizens;
- deterioration of the socio-economic situation of socially vulnerable citizens;
- decrease in entrepreneurial activity in the country;
- the decline in the quality of many goods due to the need to produce them in larger quantities;
- a decrease in lending in the banking system of the state, the emergence of shadow sectors in the economy.
Having examined the essence of such a phenomenon as inflation, the concept, types, causes and consequences of it, we consider the specifics of the methods of measuring price increases in the state economy.
How is inflation measured?
In general, inflation indicators are expressed in price indices, implying a correlation of the value of goods in the current year with respect to the previous one. In this case, the following indices can be used:
- industrial prices;
- consumer prices;
- GDP deflator.
In fact, the state’s economic system can be characterized by several indicators of inflation. The most significant for citizens will obviously be the consumer price index. The most informative macroeconomic indicator, in turn, will be the GDP deflator.
Inflation Formation Models
Having studied the nature, causes, types, consequences of inflation, we can consider the basic models of its formation.
Thus, many economists explain the occurrence of hyperinflation by the principles proposed by Cagan. In accordance with them, this economic phenomenon is predetermined by the dependence of demand on inflationary expectations of various market entities. If the adaptation of these expectations is characterized by a low speed, while the elasticity of demand for capital is low, then inflation will correspond to an increase in the money supply. But if the parameters that make up this model reach a high level, then hyperinflation can occur in the economy, the counteraction of which, as a rule, requires government intervention.
There is a Friedman model, according to which the real demand for national capital corresponds to the dynamics of population incomes, as well as expected inflation. At the same time, price growth in the economy is minimal at high growth rates of the national economy. A situation is possible in which additional monetary emission is required - in case the inflation rate is lower than those considered as optimal.
There is a Bruno-Fischer model, according to which price increases can be determined not only by the expectations of market entities, but also by the dynamics of GDP. It can be noted that this concept also involves considering the budget deficit indicators as well as the mechanisms for overcoming it that are used by the state as a significant parameter. As such, for example, emissions and loans can be applied. This model, according to many economists, allows you to analyze in detail the factors that predetermine such a phenomenon as inflation, the nature, types, causes and consequences of it in relation to a variety of classification criteria.
There is a Sargent Wallace model. In accordance with it, inflation is predetermined by the imbalance in the monetary policy of the state in terms of financing the national budget deficit. At some point, the economic authorities have to increase the money supply, as a result of which prices in the economy are rising. It can be noted that, in accordance with the concept under consideration, the state’s restraining policy in the field of finance leads to an increase in inflation. This is due to the expectations of market entities that the government will begin to compensate for the budget deficit mainly through emissions rather than loans. The best scenario for the economic authorities in this case is to reduce the budget deficit.
Having considered the common models that explain the mechanism of formation of such an economic phenomenon as inflation, measurement, types, causes and consequences of it, we can study in more detail the main methods of the state’s anti-inflationary policy.
Anti-inflationary policy of the authorities
The country's authorities can respond to price increases in the economy in different ways. But if we talk about universal methods - regardless of what types, reasons, consequences of inflation are taken into account - anti-inflationary measures can be presented in the following list:
- credit regulation;
- financial incentives;
- deflationary politics;
- currency regulation.
Depending on the economic situation, one or more of them are selected.
After the authorities determined the factors that predetermined the specifics of the characteristics of this phenomenon of inflation (causes, types, consequences), the anti-inflationary policy is fixed at the level of regulatory regulation. As a rule, the Central Bank of the state is responsible for its implementation. Specialists of this department analyze the main components of such a process as inflation (essence, causes, types, consequences). Anti-inflationary policies should be balanced, taking into account all the main factors of price growth in the state economy.
