What associations do people have when they hear the word "inflation"? Usually these are only negative emotions. Inflation, as you know, entails an increase in prices for goods and services and, as a result, a decrease in the purchasing power of the population. What does a person think if he hears that inflation can be useful for society and the development of the state as a whole? Most likely he will laugh at such words. But in vain. You should correctly understand the meaning of the term "inflation", as well as distinguish between the types of this economic phenomenon.
What is inflation?
Inflation (in English inflation) is a situation in a country when money circulation channels are overflowing with payment marks, which is why prices for goods and services are rising, and as a result, there is a decrease in the solvency of the population.
In economic theory, the term "inflation" appeared in the 20th century, but the phenomenon of depreciation of money was observed earlier, for example, during the war. But not every price increase should be called inflation. The seasonal increase in the cost of certain goods or services is a completely normal situation in a market economy. It is important to remember that inflation is primarily a long-term process, and not a one-time phenomenon. All countries of the world that exist in a market economy are subject to inflation. But is it bad? Not always. You need to be able to distinguish between types of inflation and their impact on society.
What types of inflation
Inflation can be completely different in terms of development dynamics, causes of occurrence and form of manifestation. First of all, it is very important to evaluate inflation by the rate of development:
- moderate
- galloping;
- hyperinflation.
Creeping inflation is characterized by a moderate increase in prices: up to 10% per year. With this type of inflation, the value of money is preserved, and business transactions are made at nominal prices.
Galloping inflation is accompanied by spasmodic price fluctuations: 10-2000% per year. In this situation, the contracts are signed taking into account changes in the price level, the population invests money in currency or material values. The government is carrying out many reforms, there is a difficult economic situation, which, as a rule, leads to a protracted crisis.
Hyperinflation is the most dangerous phenomenon for a country. The price increase is more than 50% per month. Economic relations are being destroyed, enterprises are closing down, unemployment is growing. Money has no value, people move to commodity exchange (barter). Even the most affluent segments of the population find themselves in a difficult situation; business and entrepreneurship are collapsing. The situation requires emergency measures by the government.
7 reasons for inflation
Specialists in economic theory have identified seven main reasons for the depreciation of the money supply:
- Wrong economic policy of the state, in which "the printing press is turned on", that is, the issue of banknotes in excess of the required quantity occurs. Such money is not backed up by the country's gold reserves and is depreciated. Especially often this situation is observed during the war.
- Mass lending to the population, as a result of which there is more money in circulation than goods.
- The monopoly of large organizations to determine prices.
- Monopoly of trade unions on the establishment of wage levels.
- Reduction of production, because of which the amount of money in circulation remains the same, and the volume of goods produced is significantly reduced.
- Depreciation of the national currency (depreciation).
- Increase in state duties and taxes.
What is observed during creeping inflation
Moderate (creeping) inflation is a completely normal process for the country's economy. A constant and uniform increase in the price level has a positive effect on the economic processes of production. Experts are sure that creeping inflation is necessary for each country. For example, technologies are being improved, thanks to which the manufacturer has the opportunity to produce more functional models, unlike their counterparts. But such product improvement requires certain costs, which affect the increase in the price level of the final product. However, the buyer has a choice: purchase expensive products with distinctive features or save and choose a budget equivalent.
Creeping inflation is an increase in prices by no more than 10% per year. Such a phenomenon does not affect the quality of life of the population and does not reduce the purchasing power of consumers. Most often, employers increase wages, so that a slight increase in prices does not hit the buyer. But for enterprises and private businesses, a gradual increase in prices is crucial for successful future development.
The negative side of inflation
Inflation entails a decrease in the purchasing power of the population and a reduction in production. The increase in prices is much faster than the increase in wages. The layer of the population that has income from the state budget suffers: pensioners, orphans, students.
There is a deterioration in the quality of services, goods, queues are increasing, the black market and the shadow business are flourishing. Creditors and budget organizations, as well as depositors, suffer losses. When the inflation rate rises above the bank interest rate, the money invested in a deposit starts working "minus".
What is the use of inflation?
In the process of inflation, there is an increase in the market value of housing, which encourages market participants to invest in construction and real estate. Creeping inflation is a gradual increase in prices (not more than 10% per year), which forces consumers to make a purchase immediately without putting money “under the pillow”, and also contributes to the development of production and the improvement of products. Enterprises invest money in various industries and projects, which positively affects the economy of the country as a whole.
In addition, a decrease in purchasing power has a positive effect on debtors. If you do not take into account the accrued interest, then inflation "eases" the debt burden. The borrower borrowed a certain amount of money, but after a certain time the purchasing power of the same amount decreased, making it easier to repay.
