Demand inflation in simple words. Methods to combat inflation. What is inflation in simple terms? For reasons causing inflation

Today, the term “inflation” is one of the most common economic concepts used by both financial experts and ordinary citizens. At the same time, not many people understand the true meaning of this phenomenon and the mechanisms of influence on it. Today we will look at methods of combating inflation and find out what it actually is.

Definition

The answer to the question of what inflation is in simple terms is this: inflation is the process of depreciation of money, that is, a reduction in its purchasing power. To put it even more simply, the amount of goods and services that can be bought today for, say, $100, in a year can no longer be purchased for that amount. It is noteworthy that this process occurs constantly, but its speed is always different and depends on the economic climate of the state.

Inflation occurs when there is more money in the market than goods. It all starts with the fact that citizens’ funds cannot provide them with the purchase of this or that product due to its shortage. All this leads to higher prices, which inevitably accompanies inflation.

Experts consider inflation to be the most dangerous phenomenon in the economy, as it is characterized by abrupt changes in prices for goods and services, a decrease in the purchasing power of society, a decrease in the value of banknotes and the depreciation of the state currency.

It is noteworthy that this process occurs both in lagging countries and in the most developed ones. The only difference is the scale and rate of inflation. In countries with stable economies, inflation growth is no more than 3% per year. But there are also states in which this figure reaches more than 15%.

Historical reference

Delving into the historical chronicle, you can find that inflation appeared almost immediately after commodity-money relations. Thus, in Ancient Greece, entire practices were invented to reduce the share of silver in coins. Initially, this ensured an increase in the treasury and made it possible to almost double the amount of funds in defense. However, soon the economy took its toll - prices began to rise regardless of the amount of additional money, and with them, government expenses also increased. All this led to a serious crisis.

The Roman emperor Nero did the same in the first century BC. He added copper to the composition of precious coins. As a result, by the third century AD there was no trace of precious metal left in the Roman denarius (the national currency).

A classic example of inflation is the multiple increase in prices in Europe after the discovery of America. There was so much gold taken from the Indians and delivered to the Old World that the price of popular goods and products increased almost fivefold. As always with inflation, low-income groups have been hit the hardest.

All these examples at one time caused significant damage to the economy, but states became acquainted with real inflation only with the advent of paper money. Thus, at the beginning of the 18th century in France, due to a lack of money, a serious crisis began that literally “strangled” the country’s economy. Scottish financier John Law allegedly found a way out of the situation by proposing to issue notes backed by gold. The new money revived the economy, but soon led to an even worse crisis.

Current situation

Based on the historical examples given, we can conclude that inflation is an exorbitant cost of the state. Moreover, it is not always caused by the greed of the ruling branch of the population. Any country maintains an army, helps unemployed citizens, builds infrastructure and carries out many other operations that do not generate profit. At the same time, the global financial system has a significant influence on the inflation processes of each country. Exchange rate fluctuations, government debts, the activities of exchange trading participants - all this and much more can depreciate the value of a weak national currency.

It is noteworthy that regardless of the cause of inflation, it affects the poor the most. In no country does the indexation of social benefits cover the depreciation of the currency. This problem is especially acute during periods of hyperinflation, when prices for basic products rise by more than 50%. Along with food, medical care and education are becoming inaccessible to many. As a result, in a matter of months the mortality rate increases and the birth rate decreases. A demographic hole is being formed, the echoes of which will be relevant in decades to come.

It is interesting to note that, according to many modern economists, a slight excess of the money supply is a positive factor for the state’s economy. However, for an individual citizen who lives on a fixed salary, inflation results only in a gradual decrease in the standard of living.

We have learned what inflation is, now let's look at the main methods of fighting inflation.

Anti-inflationary policy

In conditions of economic crisis, the priority direction of the country's financial policy is the fight against inflation. However, even in stable times it receives a lot of attention. A set of measures aimed at reducing the rate of inflation is called anti-inflationary policy or inflation targeting. It provides for two main measures: the formation of an anti-inflationary strategy and the development of anti-inflationary tactics.

Strategy combating depreciation does not have an immediate impact on the economy. It aims to reduce inflation in the long term, not just now. The main goal of this strategy is to reduce inflation expectations. The following tools are used for this:

1. Strengthening market mechanisms.
2. Changing budget policy: increasing revenues and reducing government expenditures.
3. Strengthening control over the financial system and the growth of the money supply in the country's economy.
4. Reducing the dependence of the national currency exchange rate on external factors.

If the strategy is aimed at the long term, then tactics, on the contrary, involve short-term decisions designed to change the state of the market here and now. The main tactical decisions are increasing demand or increasing supply.

In general, methods of combating inflation depend on the views of the country's government. Certain types of tactics and strategies are chosen based on the views of political leaders, plans for the development of the state and the reasons for rising prices. In order for inflation targeting as a method of combating inflation to produce results, it is necessary to take a whole range of measures.

There are three areas of targeting: deflationary policy, exchange rate policy and income policy. Each of the economic methods of combating inflation deserves special attention.

Deflationary policy

This method is based on limiting money demand. It is achieved by influencing the financial and tax levers that are available to the government. The disadvantage of this means of combating inflation is a slowdown in economic development or even contraction.

As part of the deflationary policy, the following measures are taken:

1. Limitation of money supply. It involves setting a limit on the injection of finance into the economy. At the same time, the current state of the state budget is ignored. These measures are taken even if it is in short supply. If the exchange rate of the national currency falls significantly, the central bank increases the rate, as a result of which the influx of new funds into the economy becomes more difficult. The more expensive loans are for banks, the more expensive they are for businesses.
2. Introduction of a mandatory reserve requirement. We are talking about establishing an amount that must necessarily be in the assets of all banks in the country. This method allows you to regulate the scale of activity of credit institutions.
3. Manipulations with securities. With an active increase in inflation, the central bank necessarily enters the market of government bonds and other securities. If the government's goal is to reduce inflation, then it sells government bonds, thereby reducing the amount of money in the economy. When the crisis ends, the regulator systematically returns to itself what it sold.

Exchange rate policy

For countries whose economies are heavily dependent on exports, this is the main policy to combat inflation. Its task is to normalize the exchange rate of the national currency and restore the confidence of the main players in the financial market. Thanks to measures such as fixing the exchange rate at the same level or establishing an exchange rate corridor, it is possible to limit the fall in the rate of the local currency in relation to foreign ones. At the same time, the government influences not only the levers of economic management, but also the minds of consumers, investors and foreign exchange market players. His main task is to convince people that the national currency will stabilize and anti-inflationary policies will bear fruit.

Income Policy

This set of measures is aimed at establishing control at the level of rising prices and wages. The main goal of income policy is to normalize the growth of production costs and thereby stabilize the cost of goods, services and labor.

As part of this policy, the following measures are taken:

1. Regulation of prices of socially significant goods. The result is achieved through direct and indirect regulation. The second type includes government procurement, subsidies, loans, antitrust activities, duties on exports and imports, and embargoes.
2. Voluntary regulation of price increases. The state's task is to ensure dialogue between entrepreneurs and workers. In this way, it is possible to establish real boundaries for price growth and salary expectations. This policy works equally successfully at the state, industry levels and the level of specific enterprises.

Institutional measures

Anti-inflationary policy methods are the main, but not the only forms of combating inflation at the state level. The position of the national currency can also be strengthened through institutional and monetary reforms.

Institutional methods fight against inflation refers to those measures that can be taken to create conditions for the natural growth of economic activity within the state. The better the functioning of market mechanisms, the easier it will be for new businesses to enter the market and the more jobs there will be. In addition, supply will increase, which helps to slow down or even stop price growth. Local market resources are distributed more efficiently the more liberal the state approaches the process of regulating the economy.

Currency reform called the withdrawal of old and depreciated money from the market and replacing it with new ones. The stability of new money is always supported by the state and is determined by its small volume. Such tough measures only work in conjunction with other tools to combat inflation.

How to protect personal resources from inflation?

We have already examined the main methods of combating inflation at the state level. Of course, all these processes are very important, but the average person can only observe and analyze them. What each person can personally influence is their well-being during a period of inflation. It's about preserving the value of savings. From the information above, it is clear that if you save money in national currency, then over the years it will simply depreciate. Let's find out how to protect your savings from inflation and make sure that their value does not decrease from year to year, but increases.

Bank deposit. This is the most common way to protect your funds from inflationary processes. Of course, there is no need to talk about increasing capital here, since the interest that the bank accrues annually to its depositors simply covers the increased inflation rate, which, however, is not bad. Today, banks provide a huge number of different deposits in both national and foreign currencies.

Precious metals. Another common option for saving your money. Since the supply of precious metals is not unlimited, they always increase in price. As in the previous option, there is no guarantee that the metal will bring profit over the years (it will become much more expensive), but the increase in its price will definitely cover inflationary fluctuations in the currency. Investing in gold is relevant for those who want to “mothball” their funds for a long time. For those who are interested in making quick money on volatility (price fluctuations), it is better to invest in silver. In addition to bullion, money is also invested in investment coins and other products.

Mutual funds. The next example of fighting inflation is investing money in mutual funds. This option is good because it constantly brings profit, since the interest rate exceeds inflation. The disadvantage of such investments is the fact that you can usually invest money in them no more than once every three years. Therefore, you cannot get your money back if you urgently need it. In most countries, the activities of such funds are under constant government control, which reduces the chances of inexperienced investors becoming victims of scammers.

Real estate. A very popular method of investing, which is suitable for those who have large capital. Renting out real estate is just one option for making money. In reality, there are many more of them; if you figure it out, you can make a very profitable business in this area.

Online tools and investment companies. Over the past 5-10 years, many investors have become interested in the field of online investing. Today, PAMM accounts and cryptocurrency are very popular. Thanks to these tools, you can not only fight inflation, but also make a profit. With the right approach, online investment tools can bring in up to 10% profit per month. Of course, in order to manage them correctly, you need to understand this type of income and be prepared to face the risks. Such investments require more time than depositing or renting out real estate, but the results are worth it.

Living conditions, health and education. The best investment that will never depreciate is an investment in yourself and your loved ones. Whenever possible, it is advisable to always try to improve your standard of living, take care of your health, gain new knowledge, take up your favorite hobby, go on a trip, and so on. All this develops a person as a person and makes his life full of meaning. You should not treat money invested in yourself as a pointless waste. People who spare no expense on their health and improving their standard of living are always filled with energy, which allows them to more than compensate for all the “investments.”

By investing in education and developing in the chosen profession, a person makes the most intelligent investment. True professionals and versatile personalities are always interesting and in demand both among friends and in a professional environment.

Finally

Today we figured out what inflation is in simple terms, and learned how it can be fought at the level of the state and family budget. To summarize the above, we note that inflation is the scourge of the economy. With its growth, prices for goods and services immediately increase, which cannot be said about the level of wages. Policies aimed at combating these processes set themselves the task of stabilizing the exchange rate of the national currency and the economy as a whole. Each of the ways to combat inflation has its own characteristics and neutralizes a certain stimulator of its growth. The most important condition for suppressing currency depreciation is to reduce the inflationary expectations of investors, businessmen and ordinary citizens. In this field, the state must, at a minimum, achieve a balanced budget, and, at a maximum, create the groundwork for economic growth and population income in the future.

At the level of the family budget, to combat inflation, it is advisable to invest your savings in areas that generate profit, which will be enough to at least cover the rise in inflation. Otherwise, the quantity of money will increase, and its nominal value will gradually fall. Unfortunately, it is impossible for anyone to completely avoid inflationary processes. However, by learning to properly manage your finances, you can reduce the impact of these processes on the family budget to a minimum. Moreover, forecasting inflation, which is quite complex and requires professional knowledge, in this case is not part of the required skills.

Types of inflation

• Administrative inflation: inflation generated by “administratively” managed prices
• Galloping inflation: abrupt rise in prices
• Hyperinflation: inflation with very high and rapid price increases
• Cost-push inflation: rising prices for resources, resulting in higher production costs, that is, prices of the final product
• Induced inflation: inflation, inflation caused by external factors
• Credit inflation: inflation caused by excessive credit expansion
• Unexpected inflation: inflation that is higher than expected for a certain period
• Expected inflation: the expected rate of inflation in the future due to present factors
• Open inflation: inflation due to rising prices of consumer goods and inputs
• Hidden inflation: inflation that arises due to a shortage of goods, accompanied by the desire of the state to keep prices at the same level. Expressed in the disappearance of goods in legal trade with their flow into shadow trade
• Creeping inflation: expressed in a long, gradual rise in prices
• Demand inflation: manifests itself in the excess of demand over supply, resulting in higher prices

Fighting inflation

Limitation of the money supply in circulation. It is being implemented
• Raising interest rates
• Limiting loans
• Reducing the state budget deficit
• Wage freeze
• Tightening external economic regulation

(Source: R.I. Mintso-Shapiro “Dictionary and reference book of modern economics”)

Inflation in Russia in percentage:
2007 - 11,87, 2008 - 13,28, 2009 - 8,8, 2010 - 8,78, 2011 - 6,1, 2012 -
6,58, 2013 - 6,45

Highest inflation rates in history

• 1294 - With the introduction of paper money in the Hulaguid state (northern China and Mongolia), prices increased 10 times
• 1662 - The minting of unbacked copper money led to its depreciation in comparison with silver, which led to the so-called Copper Riot in Moscow on July 25
• 1921-1923 - Germany. The average inflation rate was about 25% per day; in 3 days prices doubled, and in a month - a thousand times.
• 1941-1944 - Greece. Prices on average doubled every 28 hours
• 1946 - Hungary. In July, prices doubled every 15 hours.
• 1973 - Chile. Inflation was 1200% per year
• 1983-1987 - Bolivia. Prices have increased a million times
• 1984-1985 - Israel. Inflation 450-500%
• 1982-1993 - Poland zloty was issued from a denomination of 5000 to a denomination of 2 million
• 1992 - Russia. Inflation at the end of the year amounted to 2600%
• 1992-1995 - Ukraine. The depreciation of the Ukrainian karbovanets occurred on average by 140% per month
• 2008 - Zimbabwe. Inflation amounted to 231,000,000% per year.

In the modern world, the word “inflation” is constantly heard: in television programs and news, newspapers and magazines, at political speeches and in conversations among work colleagues. However, not all people, even if they understand this term, know why this phenomenon occurs, what consequences it carries, how to deal with it and is it necessary? Inflation is a process of growth in the general price level, which “cheaps” the money that a person has. It can become not only a factor that reduces the standard of living of the population, but also critically affect the entire economy of the country.

Causes of inflation

The causes of inflation are diverse, they are formed under the influence of many economic, political, social factors and subsequently influence the rate of inflation, its growth or decline. But all of them are in one way or another connected with an imbalance between supply and demand.

There are internal and external reasons.

TO internal relate:

• Policy of the Central Bank (inflation rises with unjustified money emission);
• Monopoly in the economy (due to the fact that the bulk of sales on the market belongs to several large companies, prices are constantly rising);
• Deformation of the structure of the national economy (if the main share of the economy is the development of military equipment and heavy industry, the market will have a shortage of domestic goods and will be filled with more expensive imported ones);
• State budget deficit (in this case, the state does not have the opportunity to support sectors of the economy that are not profitable for entrepreneurs, but important for the economy. The budget can also be covered by emissions and government loans, which will increase the amount of money in circulation and the growth of inflation);
• High taxes (indirect taxes, such as VAT, excise taxes and natural payments when selling a product are already included in its price, and there is a direct dependence on this);
• Psychological factors (inflationary expectations of the population play a role here, which affect demand: if citizens assume that prices will rise in the near future, they will try to buy things cheaper, which will increase demand);
• Excessive ineffective investments in certain sectors of the economy;
• Large expenses for social purposes that do not correspond to the real capabilities of the state budget;
• Increasing the volume of lending by banks to the population (reducing interest rates and reserve standards, simplifying the procedure).

External causes of inflation reflect the international economic life of the state. These include:

• “Global” inflation (increasing prices for imported goods, energy and raw materials “imports” inflation into the country);
• Depreciation of the national currency (to maintain imports, additional money emission will be necessary, and imported goods will become more expensive);
• An increase in external public debt (to cover debts to other countries, the state will be forced to spend its own);
• World crises (in this case, world market demand, price structure, balances of payments of countries, their currencies and debts have a huge impact, which provokes an increase in inflation in most countries);
• Internationalization of the economy (to conduct business relations, foreign currency is needed and central banks often buy it from their commercial banks through emission).
• Summarizing the external reasons, we can say that they are all a consequence of serious economic imbalances and market disequilibrium, which entails a constant excess of demand over supply.

Types of inflation

Types of inflation can be divided into groups depending on the defining characteristic:

1. For reasons causing inflation:

• monetary and non-monetary;

Monetary inflation appears as a result of an increase in the nominal quantity and velocity of money circulation, non-monetary inflation - due to structural changes in aggregate demand, changes in the formation of consumption, investment, net exports, government purchases and inflationary expectations of the population.

• supply and demand;

Demand inflation is caused by an increase in aggregate demand, supply inflation is caused by a decrease in aggregate supply. A reduction in aggregate supply can occur due to:

1. Strengthening monopolistic and oligopolistic power, trade unions;
2. Unjustified increase in labor costs;
3. Increase in taxes;
4. Rising inflation expectations;
5. And etc.

Supply inflation occurs due to rising costs of producing goods while production resources are not used to their maximum.

• Internal(price increases occur within the country’s borders) and external(price increases affect a group of countries or the global economy).

2. According to the expectations of macroeconomic entities:

• Projected(it is assumed that economic actors were aware in advance and can use this information for further economic decision-making);
• Unpredictable(economic entities are not ready for inflation and cannot think through and adjust their economic decisions to this factor).

3. According to the form of manifestation:

• open(the rise in prices is prolonged and not restrained, it is typical for countries with market economies);
• hidden(implies the establishment of restrictions and state control over prices, while at the same time the volume of the “black market” is growing);
• inflation shock(implies a sharp, unexpected increase in prices).

Measuring Inflation

There are three main measurement methods:

1. Using the Consumer Price Index (CPI)

The CPI is the ratio between the price of purchasing a certain basket of goods and services and the price of the same basket, but in the base period. This type of measurement is used more often than others. The higher the index, the higher the inflation.

2. By determining the inflation rate

The inflation rate shows changes in the price level; to calculate it, you need to find the difference between the price indices of the current year and the previous one and divide by the index of the past year (usually expressed as a percentage).

When calculating the rate value, you can judge the type of inflation:

1. Moderate: 3-10% per year (does not affect the economy of most developed countries, is considered useful for development);
2. Galloping: 10 – 200% per year (great tension in the economy, but price increases can be predicted, inflation is difficult to control);
3. Hyperinflation: more than 200% per year (money loses its value and basic functions, economic relations collapse, inflation is completely uncontrollable and requires drastic measures).

REFERENCE: Among the most famous cases of hyperinflation, prices rose in Zimbabwe at the beginning of the 21st century - 230,000,000% per year, in Hungary in 1946, when inflation reached 42 quadrillion percent.

3. Using the “70” value rule

Consequences of inflation

The consequences of inflation are also called “costs”; they differ depending on the type of inflation and the strength of the influence of external factors. Social costs include those that do not depend on the behavior of economic entities:

1. “menu costs” (constant adjustment of prices in catalogs, reconfiguration of meters and other devices, which requires additional labor, time and money);
2. “costs of worn out shoes” (people have to visit banks, ATMs, and exchange offices more often due to the increase in the cost of money);
3. Decrease in economic efficiency of production (is a consequence of distortion of price signals);
4. Irrational redistribution of income between the private and public sectors as a result of an increase in the tax burden.

If inflation is unpredictable, then other consequences will be added to the above:

1. Decrease in real return on savings (which were kept in national currency);
2. Decrease in real incomes of the population (the greatest impact here is on population groups with a fixed income: students, state employees, pensioners);
3. Redistribution of wealth in favor of the borrower (a person who took out a loan from a bank received a sum of money with one real value, and will return it with a lower value);
4. Redistribution of income between labor and capital (the share of labor decreases significantly).

How does inflation affect people's living standards?

The inflation process has an extremely negative impact on the population:

• The level of real wages decreases in relation to their nominal price (with the same money you can buy fewer goods and services than before the rise in inflation);
• Savings of the population, if they were not invested wisely, depreciate;
• Rising prices stimulate a fall in real wages;
• The population's motivation to work is decreasing;
• Social fragmentation is increasing (groups with different incomes are further separated from each other);
• The possibilities for accumulation are limited (people try to invest the freed-up funds as soon as possible, which increases consumption and reduces accumulation by the population);

REFERENCE: due to increased consumption, savings become less liquid, that is, provided that a person urgently needs money, he will no longer be able to get it so quickly (he will need, for example, to start selling the apartment in which he invested it);

• The power of government bodies is weakening (increasing dissatisfaction among citizens);
• Manufacturers are losing interest in producing quality products;
• The supply of agricultural products is decreasing in anticipation of higher prices, and there may be a shortage of some goods;
• Deterioration of the living conditions of people on state support, people with fixed incomes (students, employees, pensioners, disabled people, etc.)

Ways to fight inflation

There are two ways to fight inflation: currency reform And anti-inflationary policy.

Currency reform is used quite rarely and in certain cases. Methods for carrying it out include:

1. (implies a decrease in the gold content of monetary units or a depreciation of the national currency);
2. (enlargement of the monetary unit and exchange of old banknotes for new ones at the appropriate rate);
3. Nullification (introducing new, more expensive banknotes into circulation and completely replacing old ones with them);

Unlike monetary reform, anti-inflationary policy is not a single reform, but a whole set of measures that are aimed at reducing the rate of inflation and suppressing it. It can be done in two ways:

1. Deflationary policy;
2. Revenue Policy;

Deflationary policy is aimed at limiting money demand using budgetary and tax methods, as well as measures taken by the country's Central Bank.

Budget and tax instruments:

1. The state reduces social spending;
2. Direct tax rates are increased (to limit the volume of money supply).

Monetary measures of the Central Bank:

• Increasing the key rate (due to which the volume of bank lending and the money supply and the speed of its circulation are reduced);

REFERENCE: such a measure has negative consequences for the production sector - the more expensive the loans, the less investment and the slower economic development.

• Changing the mandatory reserve norm;

The mandatory reserve ratio shows how much money the bank is obliged to keep in its account with the Central Bank without lending it out. As inflation rises, the Central Bank increases this rate. This method, after long use, can replace the issue of money, since to increase money in circulation it will only be necessary to reduce the reserve rate.

• Transactions with securities.

The Central Bank has a significant share of government bonds in its investment portfolio. To reduce the amount of money in circulation, the Central Bank needs to start selling these securities. This tool is considered the most effective.

IMPORTANT: Deflationary policies, as a rule, slow down the development and growth of the economy, and can also provoke crisis phenomena.

Income Policy involves controlling prices and wages by freezing them or establishing the maximum achievable level.

The negative consequences of such a policy include:

1. The emergence of a shortage of a number of goods;
2. Obstacle to the development of certain industries;
3. Time-limited - this method can only be used for a short time, and after the restrictions are lifted, price increases can accelerate significantly.

How to save money during inflation?

To ensure that savings do not lose their value during the period of rising inflation, there are several ways to save them:

1. Creating an investment portfolio

It is necessary to build it with a long-term focus (the portfolio should include various securities and different sectors of the economy) and quickly manage it in a critical situation. More attention should be paid to government securities that are less exposed to risk, as well as to securities of the largest companies.

2. Purchase of raw materials: precious metals, energy and hydrocarbons, food (non-perishable or long-lasting) products

When investing money in this type of asset, you need to understand that prices on commodity exchanges are even more volatile than on. Saving and increasing funds requires considerable experience, so this method is not recommended for beginners.

3. Investing in real estate

Real estate is a material object that has real value. Working with such objects is long-term in nature, but, admittedly, it almost always pays off. Real estate allows you not only to invest money and save it as prices rise, but also to generate additional income (renting out) or provide housing/work space, if necessary. When choosing an investment object, you should give preference to those located in countries with a favorable investment climate and a high level of economic development.

Conclusion

Despite the fact that inflation is considered a rather unpleasant phenomenon, and some people are frightened by the prospect of its occurrence, we should not forget about its positive aspects. Reducing the cost of credit, stimulating the production of domestic products and filling markets with them, the possibility of increasing exports by depreciating the national currency - all these are undoubted advantages that make it possible to develop the country’s economy subject to a “soft” inflation rate (up to 6%). If these advantages are not enough, to accept the inevitability of this process, you should prepare for the rational and competent distribution of your savings for their safety.

Perhaps every sane person can more or less tolerably explain what inflation is. These are rising prices, a lack of money, a decrease in purchasing power, and in general a deterioration in the standard of living. Some people may be wondering why the government won’t print enough money to provide enough for everyone. After all, then people will start buying more goods, which means financial turnover will improve, factories and factories will work more actively, and in general everyone will feel good. In reality, such measures only worsen the situation. Why is this happening? What should the government do to ensure that the country's economy is stable and the people's lives prosperous? We will try to explain all this with specific examples.

Why you can't print a lot of money

Two striking historical events help us better understand what inflation is. The first dates back to the era when Columbus discovered America and Indian precious metals poured into Europe in an avalanche. Over the next couple of decades, an incredible amount of silver coins were minted (60 times more than before), and prices jumped 4 times. The second example concerns the times of the gold rush (second half of the 19th century).

Then gold production increased sharply in Australia and some states of America, and prices around the world increased by 50%. That is, the increase in the money supply in both cases led to an increase in inflation, expressed in a rise in the cost of goods and services. Translated from Latin, inflation is “inflation,” which, when applied to economics, means increased (inflated) prices. However, if the manufacturer set the price for his product higher than before and at the same time improved its quality, increased functionality, changed the design, this does not apply to inflation. For example, if a shoemaker sold leatherette shoes for 10 rubles, and then started making them out of leather, and even provided them with beautiful buckles and put them up for sale for 30 rubles, this is a normal phenomenon. That is, inflation is a rise in prices for the same goods and services without the slightest change.

In principle, it is possible to print additional money, but their quantity must clearly correspond to the gold and foreign exchange reserves of the state.

What is a deflator

Any country produces hundreds of types of goods, each of which has its own value. For dozens of reasons, it constantly fluctuates: for some goods it increases, for others it decreases. Therefore, it is impossible to explain what inflation is, focusing only on rising prices. For this purpose, in economics there is the concept of “GDP deflator,” which gives an idea of ​​the situation with prices in the country in total for all goods produced and services produced. Imports are not taken into account here, only local production. The deflator is determined by dividing nominal GDP (gross domestic product at prices of the year being calculated) by real GDP (the same taking into account rising prices). The result, converted into percentages, shows what the level of inflation is in the country, that is, how much the general price level has increased.

Other calculation methods

In addition to the deflator, economists calculate the inflation index, or CPI (consumer price index). To determine it, they make up the average consumer basket, that is, those goods (food, clothing, etc.) that the average resident of the country purchases over a certain period of time (month, year). The CPI and deflator both measure the rate of inflation, but in different ways. So the CPI takes into account all goods in the basket, including imports, takes into account only the goods in the basket, without affecting changes in prices for those remaining outside it, and ultimately overstates the final result. The inflation index is calculated by three methods: Laspeyres, Fischer and Paasche.

The Laspeyres index is calculated as follows:

IL = Σ(Qo x Pt) : Σ(Qo x Po),

where Qo is all goods in the consumer basket;

Pt - prices of the accounting year;

Po - base year prices.

This calculation shows the effect of income, but does not take into account the effect of the consumer substituting one product with another that is more profitable for him in price.

The Paasche index is calculated as follows:

Ip = Σ(Qt x Pt) : Σ(Qt x Po).

This calculation does not reflect the income effect and, in fact, is a GDP deflator.

The Fisher index is calculated as follows:

IF = √(IL X Ip), that is, this is the geometric mean of the Paasche and Laspeyres indices.

In Russia, these calculations are carried out by the Federal Statistics Service, or Rosstat. Inflation in the country and other economic indicators are not the only area of ​​the service’s work. In addition, it provides data on the demographic and environmental situation in the country.

How much is money worth

Some citizens believe that money only has a price at currency exchange offices. However, in economics the expressions “money is expensive” and “money is cheap” are used, which imply how many goods can be purchased for the same amount. For example, if for 10 rubles you can buy a kilogram of meat, plus a couple of kilograms of potatoes, and even a kilogram of butter in addition, they say that the chervonets is expensive. And if the same 10 rubles are barely enough only for potatoes, the chervonets immediately drops in price. That is, the question of what inflation is can be answered: it is the depreciation of money. Thus, the concept of inflation includes price increases unjustified by improvements in the properties of goods, an increase in the money supply (emission) and the depreciation of money.

Should the salary be increased?

Maybe, in order to avoid inflation, we need to give people the extra printed money and let our prices rise? Here we get the following picture: if an entrepreneur raises employee rates, production costs immediately increase. For example, a pair of shoes costs 10 rubles, of which 5 are the price of leather, 3 are workers’ wages and 2 are profit. When wages increase (rate, salary, hourly, whatever), for example, from 3 to 5 rubles, the profit disappears, and without it, production closes.

That is, by raising wages, you need to simultaneously increase either the price of goods or labor productivity, thus producing more goods. But this is directly related to demand. If, for example, you make a lot of the same shoes that no one needs, the company will simply go bankrupt. Thus, the question of what inflation is can be given a complete answer: it is an increase in the money supply, prices and wages, the depreciation of money, and a decrease in purchasing power. Developing the idea, we can add: inflation is a crisis in the economy, in which monetary savings and investments decrease, international economic relations deteriorate, people’s uncertainty about the future and depression grow.

In principle, it is possible and necessary to increase wages, but the percentage of increase must always be economically justified.

Inflation rate

No state can keep prices in check for a long time, because they depend on the cost on the world market, for example, of oil, energy, and so on. And the global market is constantly moving. That is, prices are slowly rising all the time.

If they increase by 10% or less per year, inflation is called creeping or moderate. Economists see it as useful for further stimulating the development of production, its modernization and ultimately improving living standards. The most acceptable inflation rate is 3-4%. This is exactly what it has been in recent years in EU countries.

If prices shoot up by up to 50% in a year, inflation is called galloping. Countries in which it has been recorded must urgently take anti-inflationary measures. Galloping inflation in Russia was observed in 1992-1993, when the consumer price index soared by an average of 111%.

If prices are completely out of control and rise by thousands and even tens of thousands of percent per year, this economic situation is called hyperinflation. Such situations in history only happened during wars, revolutions, and coups d'etat. For example, in Zimbabwe at one time there were bills in circulation worth 100 trillion local dollars, for which you could only buy a loaf of bread.

Forms of inflation

Above we became acquainted with explicit or open inflation, which implies rising prices and all the troubles associated with it. But there is also hidden inflation, in which prices can be stable or fall, but wages can rise. At the same time, there is a commodity shortage in the country. This concept is simple to explain: there is a shortage of goods and services, although there is a demand for them, and people have the money to purchase these goods and services. This situation was observed in the USSR, when in order to purchase many things it was necessary to register in a queue. This happens when prices are set by government officials rather than by market relations, and also when the economy is planned rather than market. In other words, not only inflation and prices are connected, but also market mechanisms of economic management, regulation, demand, and supply.

As opposed to inflation, there is the concept of deflation, when prices decrease for a short time. For example, at the end of summer, beach products that few people need are sold cheaper. Or another example: in the fall, immediately after harvesting, agricultural products are cheaper on the market. Such a reduction in the price of goods has nothing to do with hidden inflation.

Types of inflation

Depending on the reasons that gave rise to it and the nature of its course, inflation can be:

• balanced (prices for goods rise, but do not change relative to each other);
• unbalanced;
• predictable (pre-calculated and expected);
• unpredictable;
• demand inflation (same deficit);
• supply or costs (in this case, either prices for goods rise, or prices do not change, but production falls);
• official inflation (this data is provided by Rosstat);
• real (many media regularly provide information that real inflation is always higher than official);
• imported (caused by instability of exchange rates).

Control measures

Almost all leading economists agree that zero inflation is dangerous for the further development of the economy. That is, its moderate growth rate should exist. But with galloping, and even more so with hyperinflation, it is necessary to immediately take measures that depend on the reasons that gave rise to the economic crisis. Thus, a reduction in inflation is possible with the following government actions:

1. Currency reform, implying:

• introduction of new money to replace depreciated ones;
• devaluation (decrease in the exchange rate of the national currency);
• denomination (reducing zeros in price tags and salaries. For example, instead of a million rubles, only a hundred is given out, and prices change accordingly).

2. Income regulation, implying:

• in relation to wages, reduction of trade union rights;
• freezing or reducing wages;
• price regulation.

3. Deflation policy, implying:

• tax increases;
• growth of credit interest rates;
• reduction in government spending.

Inflation in Russia

In our country, the economic crisis, having experienced a sharp jump in the early 90s of the last century, gradually declined and by 2011 reached its minimum - 6.1%. Since 2012, the inflation rate has crept up again, amounting to 12.9% in 2015. These data were provided by Rosstat. Inflation in the country is growing due to a decrease in the purchasing power of the national currency, the ruble, which leads to rising prices. The second reason is that nominal indicators of economic activity exceed their real content. In 2016, a further increase in the inflation rate is expected, which is primarily due to economic sanctions against Russia, as well as a decrease in oil prices. An unpleasant “bonus” for Russians is the fact that Iran is back on the energy market. In order to lure oil buyers, he will try to lower its price to the minimum possible.

Consequences of inflation

Although leading economists believe that small (up to 4%) inflation has a beneficial effect on the overall development of the economy, this phenomenon has many negative consequences:

• decrease in income of the population;
• widening gap between rich and poor;
• decreased motivation to work;
• decreased ability to save money;
• the fragility of the position of power, which can lead to a political revolution;
• reduction in the quality of goods (manufacturers lose interest in this);
• deterioration in the living standards of the bulk of the country's inhabitants.

Story

In the history of the world economy, there have been two cases of sharp increases in prices associated with a fall in the value of the metals from which money was made.

1. After the discovery of America, a lot of gold and especially silver began to flow into European countries from Mexico and Peru. In the 50 years since the beginning of the 16th century, silver production increased more than 60 times. This caused an increase in commodity prices by the end of the century by 2.5-4 times.
2. In the late 1840s, development of the California gold mines began. Soon after this, massive gold mining began in Australia. At the same time, global gold production increased more than 6 times, prices increased by 25-50%. This type of inflation has been observed throughout the world.

The rise in prices as a result of the entry into circulation of large quantities of gold and silver is directly related to the emergence of the quantity theory of money, according to which an increase in the amount of money in circulation causes prices to rise. From the point of view of value theory, an increase in the money supply reflects a decrease in the value of the monetary material, which, with a constant value of goods, is expressed in the demand for more gold or silver for equivalent exchange. For modern economies, in which the role of money is played by obligations that do not have their own value (fiat money), minor inflation is considered the norm and is usually at the level of several percent per year. Inflation rates typically rise slightly at the end of the year, when both household consumption and corporate spending rise.

Causes of inflation

In economics, the following causes of inflation are distinguished:

1. An increase in government spending, to finance which the state resorts to money emission, increasing the money supply beyond the needs of commodity circulation. This is most pronounced during war and crisis periods.
2. Excessive expansion of the money supply due to mass lending, and the financial resource for lending is taken not from savings, but from the issue of fiat currency.
3. The monopoly of large firms on determining prices and their own production costs, especially in the primary industries.
4. The monopoly of trade unions, which limits the ability of the market mechanism to determine the level of wages acceptable to the economy.
5. A reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in prices, since the same amount of money corresponds to a smaller volume of goods and services.

During particularly strong inflations, such as in Russia during the Civil War, or Germany in the 1920s. monetary circulation may generally give way to natural exchange.

Monetarist view of the causes of inflation

Inflation is closely related to growth in money supply (using the M2 definition) over the long-run.

Methods for measuring inflation

The most common method of measuring inflation is the Consumer Price Index (CPI), which is calculated relative to a base period.

In Russia, the Federal State Statistics Service publishes official consumer price indices, which characterize the level of inflation. In addition, these indices are used as correction factors, for example, when calculating the amount of compensation, damage, etc. If you change the calculation methodology, then with the same changes in prices on the consumer market, the results may differ significantly from the official ones. At the same time, these unofficial results cannot be taken into account in real practice; for example, they cannot be referred to in court. The most controversial point is the composition of the consumer basket, both in terms of content and variability. The basket can be guided by the actual consumption structure. Then it should change over time. But any change in the composition of the basket makes the previous data incomparable with the current one. The inflation index is distorted. On the other hand, if you do not change the basket, after a while it will no longer correspond to the real consumption structure. It will produce comparable results, but will not correspond to real costs and will not reflect their real dynamics.

In addition to the consumer price index, there are other methods that allow you to calculate inflation. Typically, several basic methods are used:

• Producer Price Index(Producer Price Index, PPI) - reflects the cost of production without taking into account the additional price of distribution and sales taxes. The PPI value is ahead of the CPI data in time.
• Living expenses index(Cost-of-living Index, COLI) - takes into account the balance of increased income and increased expenses.
• Asset Price Index: shares, real estate, prices of borrowed capital, etc. Typically, asset prices rise faster than consumer goods prices and the cost of money. Therefore, asset owners only get richer due to inflation.
• GDP deflator(GDP Deflator) - calculated as the change in price for groups of identical goods.
• Purchasing power parity national currency and changes in exchange rates.
• Paasche index- shows the ratio of current consumer expenses to expenses for the purchase of the same assortment set at prices of the base period.

Grade

According to American economist and 1976 Nobel Prize winner in economics Milton Friedman: “Inflation is one of the forms of taxation that does not require legislative approval”.

see also

• Rule 72 (a quick estimate of the impact of inflation on prices)

Notes

Literature

• V. Kizilov, Gr. Sapov. Inflation and its consequences / ed. E. Mikhailovskaya. - M.: Center "Panorama", 2006. - 146 p. - ISBN 5-94420-025-1
• Semenov V.P. Inflation: a metric of cause and effect. - 1st ed. - M.: Russian Economic Academy named after. G. V. Plekhanova, 2005. - 383 p. - ISBN 5-94506-120-4

Links

• Official consumer price indices and average prices of goods and services
• Inflation calculator from 1800 to 2008 (English)
• Inflation in Zimbabwe is breaking world records (in 2008 it was 231 million percent per annum) October 9, 2008
• Belyaev Mikhail Ivanovich. Inflation.
• Inflation // Economic dictionary.

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Antonyms:

See what “Inflation” is in other dictionaries:

- (inflation) A steady trend of rising prices and wages in monetary terms. Inflation is measured based on the relative changes over a period of time in a relevant price index, usually the consumer price index... ... Economic dictionary

- (inflation) Sustainable growth in the level of prices and earnings in the national economy. If wage growth is large enough to raise production costs, further price increases are inevitable, leading to an inflationary spiral... ... Financial Dictionary

inflation- Depreciation of paper money due to their release into circulation in amounts exceeding the needs of trade turnover, which is accompanied by rising prices for goods and a fall in real wages. Credit I. excessive expansion of credit by banks.… … Technical Translator's Guide

Having a little inflation is like being a little pregnant. Attributed to Franklin Roosevelt A bad coin drives a good coin out of circulation. Thomas Gresham (XVI century) Money spoils a person, and inflation spoils money. Boris Krutier Inflation... ... Consolidated encyclopedia of aphorisms

- (inflation) A general and sustained increase in the price level. Inflation is believed to lead to uncertainty, slow down the growth of savings and investment, and also affect a country's international trade through the exchange rate, balance of payments and... ... Political science. Dictionary.