Continuation of a series of articles on fundamental analysis, sub-series — macroeconomic indicators: Inflation and deflation, part 1
Continuation of a series of articles on fundamental analysis, sub-series — macroeconomic indicators: Inflation and deflation, part 1
1.Definition
Inflation is an increase in the general level of prices for goods and services. In inflation, the price of identical goods increases over time: the same amount of money, over time, will buy fewer goods and services than before. In fact, the purchasing power of money decreases, money depreciates.
The depreciation of money leads to higher prices in a market economy. In the administrative-command system of management, the depreciation of money may not lead to a change in prices, but there is an increasing shortage of goods.
Inflation as a long, stable process should be distinguished from a one-time price increase (for example, due to a monetary reform or a political event). Inflation does not mean a simultaneous increase in all prices in the economy, because the prices of individual goods and services may go down or stay the same. It is important that the general price level, that is, the GDP deflator, change.
The opposite process is deflation — a decrease in the general price level (negative growth), usually of a seasonal nature. For example, grain prices tend to decline immediately after harvest. Long-term deflation is rare in today’s economy. An example of long-term deflation (within -1% per year) is the Japanese economy, which has been in economic “stagnation” and constant deflation for three decades (lost thirty years).
2. Causes of inflation
In economics, the following causes of inflation are distinguished:
- An increase in government spending, to finance which the state resorts to money emission, increasing the money supply in excess of the needs of commodity circulation. It is most pronounced in war and crisis periods.
- 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 unsecured currency.
- The monopoly of large firms on the determination of prices and their own production costs, especially in the raw materials industries.
- The monopoly of trade unions, which limits the possibility of reducing wages, which leads to an overall increase in costs (Or the ratchet effect).
- 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.
- Increase and introduction of new state taxes, duties, excises, etc., with a stable level of money supply.
The monetarist approach is worth noting separately:
Monetarism believes that inflation is caused mainly by monetary factors, that is, the financial policy of the state. Milton Friedman (Founder of the theory) argued that “Inflation is always and everywhere a monetary phenomenon.”
Monetarists proceed from the fact that economic growth is determined exogenously and does not depend on the growth rate of the money supply, and the velocity of money circulation is relatively stable, therefore, taking into account the equation of exchange, we find that inflation (price growth rate) is equal to the money supply growth rate.
To fight inflation with monetary methods, the so-called “dear money policy” is usually proposed. The main task is to reduce the amount of money in circulation or slow down the velocity of money circulation. This can lead to:
- increase in the tax burden;
- reduction or freezing of wages;
- reduction of budget expenditures;
- reduction in lending.
3. Classification of inflation
A. By the nature of the manifestation
The Danish economist B. Hansen introduced the concepts of open and suppressed (hidden) inflation. Open inflation is manifested in a prolonged rise in prices. Hidden inflation is characterized by the fact that prices and wages are under strict state control, and the main form of expression is a shortage of goods.
Uneven growth of prices by commodity groups generates inequality of profit rates, stimulates the outflow of resources from one sector of the economy to another.
The suppression of inflation is characterized by external price stability with active government intervention. An administrative prohibition to raise prices usually leads to a growing shortage of those goods for which prices would have to rise without government intervention, not only because of the initial increased demand, but also as a result of a decrease in supply. State subsidization of the difference in prices for the producer or consumer does not reduce supply, but additionally stimulates demand.
B. By growth rate
Depending on the growth rate, there are:
Creeping (moderate) inflation (price growth of less than 10% per year). Some economists consider it as an element of the normal development of the economy, since, in their opinion, insignificant inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates the payment turnover, reduces the cost of loans, promotes the intensification of investment activity and the growth of production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. At the same time, there is always the danger that creeping inflation will get out of state control. It is especially high in countries where there are no well-established mechanisms for regulating economic activity, and the level of production is low and is characterized by the presence of structural imbalances;
Galloping inflation (annual rise in prices from 10 to 50%). Dangerous for the economy, requires urgent anti-inflationary measures. Predominant in developing countries;
Hyperinflation (prices are growing very quickly, in different sources from 50 to several thousand and even tens of thousands of percent per year). It arises due to the fact that the government issues an excess amount of banknotes to cover the budget deficit. Paralyzes the economic mechanism, with it there is a transition to barter exchange. Usually occurs during war or crisis periods.
The expression chronic inflation is also used for long-term inflation.
C. By the level of aggregation
In addition to the official inflation characteristic of a particular country or region, personal inflation is distinguished for an individual household. The set of goods and services that a household buys may differ from the average set, so personal inflation may differ from the official one either up or down.
D. For other reasons
Stagflation is a situation where inflation is accompanied by a decline in production (stagnation).
Economists from the investment bank Goldman Sachs have coined a new term to refer to the sharp rise in prices for agricultural products: Agflation (agrarian inflation). High rates of agflation have been recorded for two years in a row: in 2006, the food price index calculated by Goldman Sachs increased by 26 percent; in 2007 it grew by 41 percent. With shrinkflation, there is a decrease in the amount of goods in the usual packaging by the manufacturer while maintaining the selling price. By reducing the volume of goods, manufacturers try to hide from buyers the increase in the price of goods, that is, inflation.
Continued in future posts :)
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