Inflation is usually called a steady increase in prices for goods and services. This means that the same amount allows consumers to buy less and less things over time. What modern person did not face this situation? In this case, economists say that the purchasing power of money is falling. Hidden inflation is even more interesting. This and much will be the subject of consideration in this article.
Definition of a concept
A market economy is characterized by a gradual increase in prices and the depreciation of money. To a certain extent, this contributes to the development of the national economy. However, everything is good in moderation. If money too quickly lose its real value, then this becomes a problem that the state has to fight. And there are different methods. Usually they are divided into monetarist and Keynesian. In a market economy, inflation manifests itself openly - in the form of price increases. With the administrative-command method of managing the economy, everything is not so obvious. In this case, prices do not rise, but there is a shortage of certain goods. This is hidden inflation. Sometimes it is also called suppressed. In a market economy, prices are set on the basis of the law of supply and demand, but in the command everything is decided by the state. Thus, it can inhibit the growth in the value of goods. This leads to the fact that demand begins to dominate supply. So there is a deficit, which over time becomes more and more if the situation in production does not change. It is necessary to distinguish inflation from a sharp jump in prices. The first phenomenon is always a lengthy process, and not necessarily characteristic of all industries at once. The opposite process is deflation. It is associated with lower prices. In a market economy, this phenomenon is rare. Often it is seasonal. For example, in the summer, prices for vegetables and fruits, milk and eggs are often reduced, in the fall - for cereals. It is extremely rare to encounter a long period of deflation in the economies of modern countries. Hidden inflation should be considered separately. This is a much more interesting phenomenon for which price increases are not characteristic at all.
Price revolution
In world history, a sharp depreciation of money has been observed several times. This was due to the decline in the value of the metals from which they were made. For example, in the first half of the 16th century, silver production increased by more than 60 times as a result of the discovery of America by European sailors and the subsequent development of its deposits. During that period, prices increased by an average of 3.5 times. But this is not an isolated case. At the beginning of the 19th century, the development of gold mines in California began, and then in Australia. This led to the fact that prices increased by 25-30%. And this was observed all over the world. It should be noted that the modern monetary system established in 1976-1978 is not based on the gold standard. Modern money is fiat. They do not have a cost of their own. Therefore, inflation is now not associated with an increase in the supply of gold and silver. A low inflation rate by most modern economists is considered the norm. Usually it is slightly larger at the end of the year, which is associated with an increase in expenditure of all economic entities. Hidden inflation is a phenomenon that occurs in countries with economies in transition. For developed capitalist states, it is not characteristic.
Reasons for inflation
As we have already found out, price increases are characteristic of the market way of managing. However, what is the reason for this? Among the causes of inflation are usually called:
- Increased government spending.
- Monetary policy of the state to expand the money supply in the economy.
- The monopoly of big business.
- Decrease in production volumes.
- The increase in taxes and duties.
Kinds
From the point of view of manifestation, it is customary to single out open and hidden inflation. And if the first type is characterized by an increase in prices, then for the second - no. Hidden inflation is manifested through a shortage of goods. Prices remain quite stable in this case. However, the purchasing power of money is still falling. Typically, open inflation is characteristic of a market economy, hidden - for a command economy. However, most modern states use a mixed style of housekeeping. Therefore, hidden inflation may occur in some countries. However, commodity shortages usually last for a short period of time. This is due to the fact that today all countries are connected by a solid network of commodity relations.
Types
Open inflation can occur at different rates. Depending on the rate of price growth, several types of this phenomenon can be distinguished. Among them:
- Moderate. The price level in this case does not exceed 10%. Most economists believe that this situation is normal and contributes to the development of the economy. If the price increase per year does not exceed 10%, then there is no need to worry about it.
- Galloping. This type is characterized by an increase in prices by hundreds of percent. Galloping inflation is extremely dangerous. If prices rise so quickly, then states usually take various measures urgently.
- Hyperinflation. In this case, prices are rising literally at an astronomical pace. In a year they can increase by thousands of percent. This can completely paralyze the country's economy. Economic ties between different entities are being destroyed. As a result, society may even switch to barter, since money is catastrophically depreciating every day.
Influence
The recent economic crisis has shown how fragile modern financial institutions are. Rising prices further increase the risks associated with lending and investing. In contracts for the construction of real estate, more and more often there are conditions regarding the adjustment of rates and amounts in accordance with the level of inflation. However, price increases may be a positive phenomenon. This is due to the fact that it allows you to attract more money and expand production. Then prices will decrease due to an increase in supply.
What is hidden inflation?
The administrative-command economy is characterized by state intervention in all areas. Government policies can cause an increase in the money supply over a long period of time or production costs. In the first case, we can observe an increase in demand, in the second - a decrease in supply. Both options suggest that prices should rise. However, this is in a market economy. The administrative-command style of managing allows the state to establish full control over prices. Their invariance will lead to a discrepancy between the volumes of supply and demand. Hidden (suppressed) inflation is manifested precisely through the occurrence of a commodity deficit. The latter may also be characteristic of a market economy. During wars or large-scale crises, the governments of capitalist countries also often intervene in the natural course of events. This is manifested through the “freezing” of prices for strategically necessary goods. And then the capitalist countries can also face manifestations of hidden inflation.
Key features
Hidden inflation manifests itself as a gap between the prices that the state has set and their real values. As a result, the population may begin to accumulate funds. At first glance, it seems that money is not depreciating. However, this is actually not the case. Manufacturers are beginning to incur ever greater losses. Over time, it becomes unprofitable for them to release something at all. The counters become empty, because the real price of goods is much higher than the one established by the state. However, it is not enough to say that hidden inflation is manifested in deficit. Its features include the emergence of new varieties of products that use fewer quality ingredients, and a decrease in servings of packaged products. In conditions of fixed prices, manufacturers are doing everything possible to reduce the cost of production.
Effects
In a market economy, an increase in population incomes or production costs leads to higher prices for services and goods. However, government intervention can inhibit this process. Hidden inflation often has far more serious consequences in the long run than open inflation. As a result, the quality of products decreases, the organization of labor, the development of the shadow economy worsen. After the government nevertheless ceases to restrain price increases, everything becomes sharply several times more expensive, which often leads to a new round of crisis.
Hidden inflation: an example of the USSR
The Soviet Union, especially during the time of Stalin, is a truly unique state. During this period, the government pursued a policy of lowering prices while increasing wages. This led to suppressed (hidden) inflation. The country experienced a shortage of goods. The residents had money, but there was nothing to spend it on. The savings rate significantly exceeded that in Western capitalist countries. The collapse of the USSR provoked a sharp depreciation of money, which was associated with a sharp drop in the level of production and general instability in the economy. The post-Soviet republics were swept by a wave of inflation.
