There is inflation. What is inflation: basic concepts and definitions

20.12.2023

For goods and services. This leads to a decrease in the purchasing power of consumers. But the question of whether it is necessary to fight inflation cannot be given a hasty, obvious answer. This is due to the fact that a certain percentage of price increases is even useful for the economy, since it allows it to “accelerate” it. We will talk about this and much more in this article.

Briefly

If we talk about this in simple language, then we need to turn to everything we understand - money. What happens to them when the general price level rises? Let's say we have a salary of $100. If there is inflation, every month we will be able to buy a smaller set of products with it. Or let's look at another example. Let a pack of chewing gum cost one American dollar in 2016. If the annual inflation rate is 2%, then in 2017 you will have to pay 1.02 dollars for it. USA. Thus, this phenomenon leads to the depreciation of the country’s monetary unit.

Types

The question of what inflation is is answered as follows: it is a steady increase in the general price level. However, you need to understand that statistics on this indicator are generalized and do not take into account all goods and services. Should we fight inflation? Before answering this question, it is necessary to understand what causes it. The following types of inflation are distinguished:

Deflation. This is a phenomenon in the economy that is expressed in a general drop in prices.
extremely rapid price increases. It could even lead to the collapse of the national financial system. One famous example of hyperinflation occurred in Germany in 1923. Then prices rose by 2500% per month.
Stagflation. It is a combination of high unemployment, stagnant production and inflation. Stagflation was common in 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 among various schools of economics for many years. However, they still did not reach a consensus. However, all theories can be divided into two movements:

Demand inflation. It is due to the fact that there are few goods, but there is a lot of money in circulation. Is it necessary to fight this type of inflation? How to do it? The main way here will be to raise interest rates. This will lead to a decrease in money in circulation. Demand-pull inflation is common in developing economies.
Supply inflation. It is due to the fact that producer costs increase. In this regard, they are forced to increase prices in order to maintain the profitability rate of their business. Costs include not only spending on production resources. Supply-side inflation can be associated with increases in taxes or wages.

Consequences

If you ask a non-specialist on the topic, almost everyone will answer that inflation is a clearly negative phenomenon that empties wallets and worsens the standard of living. However, in reality it affects different segments of the population differently. An important factor is whether it is expected or not. Is it necessary to fight inflation if everyone is already prepared for it? Expectations offset price increases. This is due to the fact that banks have time to change interest rates, and people find a higher-paying job or discuss a salary increase with their bosses. Serious problems arise when inflation is unexpected:

Lenders lose money and borrowers win. If inflation is high enough, it may well compensate for the interest to be paid by the latter.
Uncertainty about the future forces companies to save money and not invest in development. This causes significant damage to business and the entire national economy in the long term.
People who have a fixed income, such as pensioners, experience a deterioration in their standard of living due to the depreciation of money.
If inflation in a country is higher 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 everything is fine. There is no need to think about how to fight inflation if its level is 2-3%. This is evidence that the economy is growing. If there were no inflation at all, this would be an indicator of a deteriorating market situation.

Statistical evaluation

Now that we have talked about it in simple terms, let's move on to how it is measured. Statistical assessment of this phenomenon remains a difficult problem. The debate often revolves around which goods and services to include in the representative set. Once the basket is determined, inflation is measured based on its value in the current year compared to the previous year. In the USA the following two indicators are used:

Consumer price index. It evaluates inflation from the buyer's point of view. The representative set here includes food, clothing, gasoline, and cars.
Producer price index. He looks at 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 for various groups is as follows:

Food. Inflation growth rate is 5%.
Transport - 5.4%.
Clothing and footwear - 7.6%.
Recreation and culture - 6%.
Furniture and household appliances - 5.6%.
Alcoholic beverages and tobacco products - 8.7%.

Compared to 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 figure was recorded in December 1992. Then it amounted to 2333.3%. The lowest was in April 2012. During this period, the inflation rate in the Russian Federation was only 3.6%.

Control and regulation

There are many ways in which the government fights inflation. Conventionally, they can be divided into several groups:

Methods of monetary and fiscal policy.
Establishing a fixed currency exchange rate.
Gold standard.
Direct regulation of wages and prices.
Stimulating economic growth.
Providing subsidies and assistance to low-income segments of the population.

Learn more about the different methods

One of the methods of combating inflation is to peg 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 country. 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. At that time, the currencies of most countries were pegged to the dollar. After the 1970s, states moved to A similar situation with inflation control occurs when the national currency is pegged to gold.

Another method of combating price increases is to regulate wages and prices. It was widely used during wartime. Direct control is typical for planned economies. In market conditions, price regulation for important product groups can only be a temporary phenomenon. Any state strives to increase the rate of economic growth. To do this, it invests money in the development of production, infrastructure, healthcare and education systems. If the rate of economic growth corresponds to the increase in the money supply in circulation, then inflation does not occur. In conditions when the state no longer has any other choice, it begins to subsidize low-income citizens.

Monetary and fiscal policy

Mechanisms in this category are used most often by governments and central banks. To overcome inflation, interest rates increase and the money supply decreases. Central banks are trying to keep the increase in the general price level within 2-3%. Deflation is believed to have a detrimental effect on the economy. Higher interest rates reduce the amount of money in circulation. This leads to a drop in prices. This is the monetarist method. Keynesians believe in reducing aggregate demand through fiscal policy, that is, increasing taxation and reducing government investment.

Humanity created money as a tool for exchanging it for goods and services. With the growth of population and the development of commodity-money relations, humanity is also faced with unfavorable phenomena of money circulation, such as inflation. No matter how economically stable a state is, inflation exists in it to a greater or lesser extent. So what is inflation?

Inflation and its causes

When the amount of money in circulation among the population significantly exceeds the amount of goods and services, a phenomenon called inflation occurs. Prices rise, but people's incomes remain at the same level. The state, trying to solve this problem, strives to produce and put into circulation more monetary units only contributes to the depreciation of money, i.e. the phenomenon of inflation itself. In the historical past, inflation spikes have occurred for several reasons:

Periods of wars
Drought and crop failure
Population hunger

In the past, the population switched to natural exchange between each other as a method of overcoming the crisis caused by inflation. Now inflation is a stable phenomenon. In the modern world, the state has learned to control its rate of growth of economic development and control inflation rates, avoiding their critical values and crisis. The growth of the welfare of the state and the population is inextricably linked with the rate of development of inflation in a particular state. What are the causes of inflation in our time, in addition to those associated with our ancestors?

A thoughtless and sometimes deliberate increase in lending to the population. Which contributes to an increase in the volume of money among the population
A general decrease in the number of goods and services, while maintaining household income at the same level
Obstacles of trade unions of the working population of the state in regulating wages in accordance with the economic situation in the country
Increase in taxes, duties and licenses controlled by the state with a stable and unchanged amount of money supply

More than one country suffers from inflation. Modern economic relations bind states into partnerships. Countries exchange goods and services, and foreign currencies are in circulation within states. Therefore, controlling the level of inflation in one particular country is very important, as it will inevitably affect neighboring countries and partners.

The word "inflation" comes from the Latin inflatio, which means inflation..
Inflation is the depreciation of money, as a result of which prices for goods and services rise rapidly. The cause of inflation is an increase in the money supply without an increase in the supply of goods.

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

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.

Inflation is one of the most serious problems in the economies of most countries in the world. The phenomenon of inflation existed at the beginning of the development of monetary relations in society and, as a rule, it manifested itself in difficult times for states and communities, such as war and coups d'etat. Today, inflation has become a constant companion of states, taking on a chronic form. What is inflation in reality, what are the reasons for its occurrence, what does it lead to, and what methods of overcoming inflation are considered the most effective in the 21st century.

Definitions of “inflation”

At the moment, there are many definitions of this economic phenomenon, although most of the definitions are quite similar to each other:

Inflation- this is the depreciation of money as a result of too much production of monetary units in comparison with the needs of the market and trade turnover, which leads to higher prices and lower wages.
Inflation- reduction in the purchasing power of money, its depreciation.
Inflation- this is a significant or insignificant increase in prices in the state, caused by an imbalance in the country’s markets in favor of demand.
Inflation- this is a situation in which the cost of consumer goods increases, and the ability to purchase goods from consumers noticeably decreases.

As a rule, during a period of inflation, prices increase unevenly for only some goods, while others remain at the same price level. Usually, during even severe inflation, some prices fall rapidly, while others rise. Uneven price increases are considered one of the weak points of inflation. A decrease in wages leads to a decrease in the purchasing power of the population, and therefore the demand for most goods begins to fall, and this poses a direct threat to the country’s economy.

The rate of inflation growth and its other manifestations depend on the type of inflation.

Historical examples of inflation

Inflation has existed since the beginning of market relations between people. The rulers of the first countries of the world tried to reduce the rate of inflation by raising taxes and other primitive measures. Let's consider the striking manifestations of inflation in the history of different countries of the world:

1. Inflation in France

One of the most striking examples of this phenomenon is the situation that developed in France during the bourgeois revolution in the second half of the 18th century. State authorities began to issue banknotes to cover state expenses. The issue of assignats led to a rapid rise in prices. In just a few years, the cost of a loaf of bread has tripled, not to mention other essential products. Many workers lost their jobs, and the wages of the working part of the common population were not enough to cover even basic expenses.

Almost all segments of the population suffered from inflation. The main blow fell on rural residents, simple artisans and factory workers. The authorities, instead of preventing unrest in the state and helping the population, began to pursue an anti-people policy, eliminating all those who were dissatisfied. The situation in the country stabilized only after the coup d'etat, when the new authorities established fixed prices for basic necessities and created a special unit to seize surplus products from wealthy merchants. Also at that time, ration cards came into use.

Unfortunately, although these measures produced results for a while, they could not completely eliminate all the consequences of the strong inflation of previous years, and soon inflation again reached its peak.

2. Inflation in Russia

Throughout its historical development, Russia has known many examples of inflation. The most striking case was the increase in the issue of paper money during Tsarist Russia. At that time, the state’s economy was going through hard times; the treasury lacked funds after wars and excessive spending by the royal family. Then paper money was introduced into circulation. They were called banknotes, and the first issue exceeded 1 million rubles. It was believed that the issue of paper money would successfully replace heavy and inconvenient coins. In reality, this led to severe inflation and a significant decline in the state's economy.

In the 19th century, inflation again visited Russia due to emissions and growing budget deficits. The war marked huge expenditures for the state, and the budget deficit continued to grow. Inflation, as one would expect, hit the common population, especially peasants, the hardest. The exploitation of people by landowners reached its peak. In addition, inflation processes affected production and subsistence farming. Soon the cost of goods increased several times, and speculation flourished in the country.

The authorities took some measures to reduce inflation, in particular, the issue of banknotes was
stopped, and previously issued money began to be actively withdrawn from circulation. Unfortunately, attempts to stabilize the national currency failed miserably. Soon the cost of basic goods and food increased by more than 80%, and wages fell several times.

Throughout history, inflationary processes have occurred in one form or another in almost every developed country in the world. Typically, inflation reached its peak during prolonged wars and changes in government.

Types and causes of inflation

Inflation can be divided into several types, depending on the rate of its growth:

Moderate inflation (creeping)

This is a small increase in prices in the state (less than 10% per year). Economists consider such inflation to be a natural process in the economy, which stimulates the development of production in the country and contributes to the implementation of more effective economic policies. Moderate inflation helps to adjust prices, make loans more accessible to the population, intensify investment activity and accelerate the development of production, which, in turn, under favorable conditions should lead to stabilization of the level of prices and wages, that is, inflation is the general growth of production in country with a slight increase in prices. But even this inflation can pose a danger to the development of the state; there is a risk of inflation leaving state control and a significant increase in inflation growth. This is especially true for those countries where the level of production is not very high and there are no normally functioning mechanisms for regulating economic activity. A natural question arises: what is low inflation? Low inflation is a price increase of no more than 4-5% per year.

Galloping inflation

High rates of price growth in the state, in comparison with moderate inflation (10-100% per year, sometimes more), but less high than in the case of hyperinflation. Preventing galloping inflation is much more difficult, plus it is impossible to control. Rising prices lead to a constant increase in wages, and this leads to the depreciation of the currency.

Inflation is called galloping if the rate of growth in prices for goods exceeds 10% per year and is growing rapidly. It is believed that galloping inflation is an intermediate link between moderate inflation and hyperinflation. Galloping inflation is dangerous because in such economic conditions there are no incentives for the development of enterprises, financial markets very quickly come to their decline. Money quickly depreciates, the population seeks to invest in real estate, etc. To cope with galloping inflation, it is necessary to review the state’s monetary policy and make fundamental changes to it. Otherwise, the rate of inflation will constantly increase.

Hyperinflation

Price increases of more than 200% per year. Hyperinflation poses a great danger to the economy, it is more difficult to cope with, inflation becomes completely uncontrollable and the usual methods of combating this phenomenon no longer have any effect. With hyperinflation, money not only loses value - it no longer works; monetary relations are replaced by barter exchange. The rich segments of the population lose all their savings and are forced to adapt to the new order of things. Speculation develops in society, production almost completely stops, new monetary units are printed with triple force. In addition, they are trying to get rid of money in every possible way by buying essential items. As a result, demand increases greatly and shortages of many goods appear.

The best example of hyperinflation is considered to be the situation that developed in a number of countries after the First World War. People tried to spend their salaries on necessary products during the day, since the very next day prices could increase many times over.

Inflation can also be classified according to its degree of predictability. Thus, it is customary to distinguish between expected inflation, which is a natural process in the economy, and unexpected inflation, which was not prevented in time, and therefore, the necessary measures must be taken to eliminate inflation.

Types of inflation according to the nature of its manifestation:

Open (explicit)

Open inflation is characterized by a gradual rise in prices and a decrease in wages; such inflation slowly undermines the economy of states.

Suppressed inflation

Such inflation , on the contrary, it quickly passes, as the state takes measures to suppress it by controlling the market. The second type of inflation is more typical for countries with strong government control over production and the economic sector of the country.

Hidden inflation

This is a significant deterioration in the quality of products sold at the same prices. According to economists, open and predictable inflation is always preferable to other types, although in practice in most countries this happens very rarely.

Considering the causes of inflation, the following classification is distinguished:

Demand inflation

This is excess demand for goods when there is a shortage of these goods. Due to excess demand, prices begin to rise rapidly. As a rule, demand-side inflation is caused by budget deficits and a constant increase in government debt. In wartime, demand inflation occurs as a result of increased military spending. Another reason for demand inflation is considered to be the excessive availability of loans for the population and the emergence of excessive demand for certain goods. The influence of foreign exchange in the state also provokes excessive demand for goods in the country.

Cost-push inflation

This is a rapid decline in the rate of production growth, which leads to a significant increase in unit costs. This, in turn, provokes a decrease in the total volume of production in the country, a shortage of goods and an increase in prices for these goods.

The situation with production will constantly worsen, in addition, the services market will expand and wages in this market will rise.

Worker productivity will remain low as the cost of services in the market skyrockets. Taxes will rise and costs will rise.

In addition to the above types of inflation, economists often identify other types of this phenomenon:

Stagflation

This type of inflation is characterized by the simultaneous presence of several indicators: an increase in the general price level, a rapid increase in unemployment and a significant reduction in production volumes. The cause of stagflation is often the very fact of expectation of inflation, when the owners of large factories and other factors of production begin to increase the cost of their products due to the expectation of a fall in profits due to inflation.

Administrative inflation

Its cause is excessive state control over the production sector of the economy.

Credit inflation

Inflation is caused by increased credit expansion of banks.

Monetary inflation (monetary)

Monetary inflation is a significant increase in prices in a country due to the issue of money. Inflation of this type is manifested in rising prices, a reduction in the overall volume of supply on the market, and a shortage of goods. In the economic literature, monetary inflation is rarely distinguished as a separate type, classifying it as demand inflation.

Summarizing the above, we can conclude that inflation is the process of increasing prices for goods and services while reducing demand and depreciating money.

The opposite of the concept of inflation is the definition of “devaluation” - a significant decrease in the exchange rate of the state’s currency in comparison with the monetary units of other states.

Consequences of inflation for the state

The consequences of this phenomenon largely depend on the type, causes, duration and level of inflation. State control over the economy also plays an important role in preventing critical consequences for the production sector of the economy. It is believed that slight inflation (no more than 10% per year) stimulates the economy and new forms of production, helps to extract more money from the products sold and improve the quality of goods. In addition, low inflation helps the state pay off its external debt faster. But high inflation, especially hyperinflation, causes irreparable harm to the state:

Rapid decline in economic growth

Investments, including foreign ones, are becoming a luxury for entrepreneurs due to the inability to calculate all the risks and the effectiveness of financial investments. Entrepreneurs cannot be sure of the price of their products, and releasing new products seems to be an impractical solution until the economy stabilizes. This, in turn, leads to increased demand for goods and decreased productivity.

Depreciation of funds

All implicit money of the common population quickly depreciates, as a result of which the purchasing power of people decreases. A similar situation occurs with entrepreneurs who are forced to either reduce the number of products produced or use lower quality elements in production.

Unfair distribution of funds among the population

For some people, their salaries rise with the rate of inflation, for others they remain at the same level. As a result, most of the state's population suffers.

Reducing the influence of money

The rapid depreciation of money provokes a transition to other relationships; the population seeks to invest available funds in foreign currency, real estate, jewelry and other assets. Then the population switches to the exchange of goods, returning to barter relations characteristic of past societies.

Negative attitudes of people in society

Loss of a job, depreciation of all savings, unstable economic situation and other factors lead to an exacerbation of negative trends in society. In extreme cases, this leads to mass unrest, strikes, dissatisfaction with the authorities and even coups d'etat.

Measures to prevent and combat inflation

Since in modern economic societies inflation is a necessary and inevitable process, in order to prevent the increase in the rate of inflation and stabilize the economy, the state is obliged to carry out a number of measures that will avoid the negative consequences of destabilizing the economy. There are several main ways to prevent and reduce inflation, which are successfully used in most states with a market economy:

Rapid reduction in the growth of money supply in circulation

This method is commonly called “shock therapy.” Thanks to the introduction of this method, inflation expectations in society are reduced, and trust in the government increases many times over. This method helps slow down the rate of growth of inflationary trends. The introduction of this method is carried out in two ways: the abolition of the old monetary unit and the strengthening of the old monetary unit. A decrease in the exchange rate of the state's currencies is also used - devaluation.

Gradual decline in money supply growth rates

This method is advisable to use in cases where the rate of inflation growth is insignificant, since at rapid rates of inflation growth the method will not give the same effect as “shock therapy”.

Regulation of prices for goods and incomes of the population

In many ways, this is a dangerous method of regulating inflation, since after state control is removed, the inflation level will return to its previous positions or increase significantly. The method is based on indexing the income of the state’s population according to the growth rate of inflation, including reducing the growth of wages and prices for goods by “freezing” them for some time.

Also, to stabilize the situation, measures are being taken to optimize the country’s tax system, stabilize expenses in the state and ensure a balance between the growth of wages and prices of goods.

We hear about inflation every day in the news. On TV we are told the real and expected percentage of inflation, and from the tone of the presenter it becomes clear that inflation is not a pleasant phenomenon and when it grows, life becomes worse. We decided in this article to tell, as freely as possible and without complex expressions, what inflation is in simple language.

A simple definition of inflation

The most accurate definition of the phenomenon of inflation can be found in the Dictionary of Foreign Words from the 1964 edition: “Inflation is the depreciation of paper money as a result of their release into circulation in amounts exceeding the needs of trade turnover.” Now let’s try to explain in simple terms how this depreciation actually occurs.

Video on the topic:

In simple terms, inflation begins when the amount of money in circulation exceeds the need for it in society, and this is the main cause of inflation. Thus, citizens have a lot of money in their hands, but few goods and services. All this leads to a loss of purchasing power of money and rising prices. Therefore, a simple definition of inflation is a general increase in prices for services and goods and a loss in the value of money.

Where does inflation come from?

Where does it come from - the causes of inflation:

During wars, in an effort to prevent a decline in the standard of living of citizens, the state prints large quantities of unbacked paper money;
Inflation is caused by an increase in lending to the population, which leads to an increase in the money supply in circulation;
Raising prices by monopolists for essential goods, such as gasoline, also causes inflation;
A secondary cause of inflation may be trade unions that do not allow the level of earnings to be adjusted in accordance with market requirements;
The most likely cause of inflation is a general decline in the country's economy while citizens' salaries remain the same.

Here's a helpful video:

Having understood the concept of inflation, understanding what it is . Having understood what its essence is and how its level is measured, now we will analyze the types of inflation. Economists divide the phenomenon of inflation into the following types:

Administrative - created by administrative (managed) prices;
Galloping - prices rise very quickly;
Credit - the reason is the excessive expansion of credit services by banks;
Hyperinflation - its essence implies an even higher rate of price growth than with galloping inflation (over 100% per year);
Creeping - everything happens relatively slowly;
Imported - caused by the impact of foreign economic phenomena - excessive influx of foreign currency into the state, rising prices for imported goods;
Induced - caused by certain economically objective factors of inflation;
Premature - appears in the economy before reaching full employment;
Social - this type is characterized by a rise in prices as a result of rising costs, which are caused by introduced social requirements for the quality of goods produced, environmental protection, etc.;
Stagflation is a combination of inflation and stagnation. In this situation, the economy experiences a simultaneous decline in production, rising prices and unemployment.

Argunov Dmitry Borisovich