The rate of price growth is determined by inflation. See pages where the term creeping inflation is mentioned. Declining standard of living

Inflation- This price increase for goods and services directly related to purchasing power society (that is, over time, the same amount of money can buy less and less goods). Inflation should not be confused with a term such as " price jump", because it has a longer and more stable nature, and its impact is uniform across all groups of goods and services, although some of them may not be subject to inflation.

The opposite term is deflation, that is, a decrease in prices, is a rather rare phenomenon in the modern economy, most often having a seasonal nature: for example, a gradual decrease in the price of greens, radishes, cucumbers by mid-summer, and then a rise in prices again.

Causes of inflation.

There are seven main ones in economics reasons for inflation:

1. An increase in government spending, the financing of which causes an increase in the money supply (turning on the “printing press”) beyond the needs of commodity circulation. This reason is most noticeable during periods of economic crisis or war.
2. Mass lending, which also provokes an increase in the money supply.
3. Monopoly of large companies on setting prices (especially in resource-extractive industries).
4. Monopoly of trade unions in determining wage levels.
5. Reduction in production volume (the same amount of money in the country corresponds to a smaller amount of manufactured goods, that is, more money per unit of goods).
6. Decrease in the exchange rate of the national currency (especially with a large number of imports into the country).
7. Increase in taxes, duties, excise taxes at a more or less stable level money supply.

Types of inflation.

1. Demand inflation (or product shortage) is when demand for a product exceeds supply.
2. Supply inflation is an increase in production costs ( costs) provokes a decrease in manufactured products.
3. Balanced inflation - all prices rise evenly, regardless of the type of product.
4. Unbalanced inflation is an uneven increase in prices for various goods and services.
5. Projected inflation is an expected phenomenon in light of the development of the state's economy.
6. Unpredictable is the most unpleasant type, since the population may even end up in panic from such a sharp and unexpected rise in prices.
7. Consumer expectation inflation is a type of inflation that occurs when rumors of an impending price increase force producers to raise prices in advance, even in the absence of an economic crisis.

Three more types of inflation depend on the rate of its growth:

1. Moderate, or creeping inflation- the slowest type, considered by some economists as normal economic development (in their opinion, such inflation only stimulates the development of the state’s economy if it does not exceed 10% per year). However, there is always a danger of this type of inflation turning into the next type.
2. Galloping inflation prevails in developing countries and is dangerous for the state’s economy. With it, price increases can range from 10 to 50% per year.
3. Hyperinflation is a terrible phenomenon in the economy: price increases can reach hundreds and even thousands of percent per year. As a result of a huge budget deficit, an excessive number of banknotes are issued, which paralyzes the economic activities of the state.

Consequences of inflation.

1. The difference in cash reserves (National Bank reserves) and cash flows, which provokes the depreciation of cash reserves and securities.
2. Spontaneous redistribution of income (sellers, creditors, exporters and budgetary organizations lose, and buyers, debtors, importers and workers in the real sector win).
3. Distortion of most economic indicators (profitability, GDP, etc.).
4. The fall of the national currency.

Anti-inflationary policy.

Anti-inflationary policy is a set of government measures to regulate the economy by suppressing inflation.

Types of anti-inflationary policies:

1. Deflationary policy is a policy of regulating demand through credit and tax mechanisms: reducing government spending, increasing interest rates on loans, limiting the money supply. The downside is that this type of policy leads to a decrease in economic growth.
2. Income policy is the control of both prices and wages by setting their limits. The downside is that this may cause public discontent. The second option is external loans, which leads to an increase in public debt.
3. Indexation policy - indexation of pensions, scholarships, salaries. Indexing is less efficient than the previous two options.
4. Stimulating the expansion of production and the growth of savings of the population is the most difficult, but the most effective method.

When studying the concepts of inflation and purchasing power, we can mention such an interesting concept as the Big Mac Index - a way to determine purchasing power. This standard sandwich from McDonald's acts as an indicator of the real exchange rate of the national currency, purchasing power, as well as the security of the population, because its price is not the same in different countries and directly depends on what was listed. According to 2015 data, Big Mac in Ukraine it costs 1.2 US dollars, in Russia - 1.36 US dollars, in the USA - 4.8 US dollars, and in Switzerland - as much as 7.54 US dollars.

Inflation— an increase in the general level of prices for goods and services. With inflation, the same amount of money will, over time, buy fewer goods and services than before. In this case, they say that over the past time the purchasing power of money has decreased, money has depreciated - it has lost part of its real value.

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, that is, it increases 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.

Types of inflation.

Depending on the growth rate, there are:

1. creeping(moderate) inflation(price growth less than 10% per year). Western economists view it as an element of normal economic development, 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.
2. Galloping inflation(annual price increase from 10 to 50%). It is dangerous for the economy and requires urgent anti-inflationary measures. Predominant in developing countries.
3. Hyperinflation(prices are growing at an astronomical rate, reaching 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. It paralyzes the economic mechanism and causes a transition to barter exchange. Usually occurs during periods of war or crisis.

The expression is also used chronic inflation for long-term inflation.

The opposite process of inflation is deflation - a decrease in the general price level. In the modern economy, it is rare and short-term, usually seasonal in nature.

Consequences of inflation.

1. Redistribution of monetary resources in favor of individuals.

2. Violation of normal socio-economic relations in the country.

Creditors, savers, entrepreneurs and people on fixed incomes suffer from inflation.

The state, borrowers and people with unfixed income benefit from inflation.

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.

The following types of inflation are distinguished:

By degree of manifestation:

Creeping inflation– inflation, manifested in a long-term gradual increase in prices. Creeping inflation is characterized by relatively low rates of price growth, up to approximately 10% or slightly more percent per year. This kind of inflation is common in most countries with developed market economies, and it does not seem to be something unusual. Data for the 70s, 80s and early 90s. in the USA, Japan and Western European countries, they are talking about the presence of creeping inflation. The average inflation rate in the countries of the European Community has been about 3-3.5% in recent years;

Galloping inflation– this is inflation in the form of an abrupt increase in prices (price increases by 20-2000% per year). Such high rates in the 80s. were observed, for example, in many countries of Latin America and some countries of South Asia. According to the calculations of the Central Bank of Russia, the consumer price index in our country in 1992 rose to 2200%. Consumer prices outpaced the growth of household incomes. Below are consumer price indices and growth rates of nominal monetary income in the CIS countries (1992 to 1991, in number of times). Galloping inflation refers to a phenomenon in the form of an abrupt rise in prices, which, as a rule, is caused by sudden changes in the volume of the money supply or changes in prices under the influence of external factors. A sharp change in the volume of money supply may occur as a result of emission caused by the emergence of a budget deficit. Issue is the release into circulation of additionally printed and minted banknotes and coins. The budget deficit is the excess of government spending over government revenues received from taxes and non-tax payments. The excess of government revenues over government expenditures is called a surplus.

Hyperinflation– this is inflation with a very high (both uniform and uneven) rate of price growth, usually above 50% per month. It is usually caused by the same factors mentioned above. Hyperinflation is a phenomenon classified as a crisis, and to eliminate it, slightly different methods are used than with regular inflation.

With hyperinflation, prices rise astronomically, the discrepancy between prices and wages becomes catastrophic, the welfare of even the most affluent sections of society is destroyed, the largest enterprises become unprofitable and unprofitable (the IMF now defines hyperinflation as a 50% increase in prices per month). Running a successful business in hyperinflation is almost impossible. It can only be a survival strategy. The recipe for survival is this: autonomy and self-sufficiency, simplification of production, reduction of external relations, naturalization of the basic elements of intra-company management. Increasingly, industrial enterprises have to start their own greenhouses, pig farms and even mini-power plants, and increase the emphasis on barter and clearing operations.

by mode of occurrence:

Administrative inflation- inflation generated by “administratively” controlled prices;

Cost inflation– inflation, manifested in rising prices for resources and factors of production, as a result of which production and distribution costs rise, and with them the prices of manufactured products. The reasons for rising prices for resources are, as a rule, changes in world prices for resources and a depreciation of the domestic currency. In turn, an increase in costs for a specific product affects changes in prices for other goods, since in order to purchase goods that have become more expensive, it is necessary to raise the price of your product.

Demand inflation– inflation, manifested in rising prices caused by an increase in household income, i.e. growth of effective demand (when the total monetary income of the population and enterprises increases faster than the growth of the real volume of all goods and services). Typically, this type of inflation occurs most often at full employment. It does not matter how demand increases - due to an increase in government spending (for example, on military and social orders) or due to an increase in demand for goods and services from entrepreneurs.

Demand inflation is caused by:

Militarization of the economy and increased military spending;

Budget deficit and growing public debt.

Supply inflation- inflation, meaning a rise in prices that was provoked by a significant increase in production costs in conditions where production resources were underutilized, for example, in a situation where enterprises are carrying out a major modernization of their assets.

Fixed assets, or means, are long-term means of production, involved in many production cycles and having long depreciation periods, which is understood as the process of gradually transferring the cost of worn-out means of labor to the product produced with their help.

Imported inflation- inflation caused by external factors, for example, excessive influx of foreign currency into the country and increased import prices;

Induced inflation– inflation caused by any other economic factors;

Credit inflation– inflation caused by excessive credit expansion;

Unforeseen inflation- the level of inflation that turned out to be higher than expected for a certain period;

Open inflation– inflation due to rising prices for consumer goods and production resources; characterized by a general increase in prices.

One of the first mechanisms of open inflation can be called adaptive inflation expectations. They represent a psychological phenomenon, a tendency, a way of thinking that determines the behavior of subjects of economic life. The most important factor in the formation of inflation expectations is the rate of price growth averaged over a certain period of time preceding a given moment. If high inflation rates are observed during this period, then business entities include these rates in their plans for the future: consumers increase purchases of those goods whose prices tend to increase the most, as a result of which current demand is pumped up, causing a repeated rise in prices for goods and services; Manufacturers and traders set increasingly higher prices for their products, which leads to further price increases and increased inflationary expectations. A self-sustaining process of accelerated price growth arises under the influence of inflation expectations.

Suppressed (hidden) inflation- inflation arising as a result of a commodity shortage, accompanied by the desire of government agencies to keep prices at the same level. In this situation, there is a “washing out” of goods on open markets and their flow to shadow, “black” markets, where prices rise; Hidden inflation is typical for centralized economies, where so-called fixed state prices are quite stable and “officially” hardly grow.

Expected inflation– the expected level of inflation in the future period due to the influence of factors of the current period.

Can be predicted and predicted in advance, with a sufficient degree of reliability; unexpected - occurs spontaneously, sporadically, a forecast is impossible. The factor of expectation and predictability sheds new light on the issue of the influence of inflation on business strategy, namely: if all firms and the entire population know for sure that next year prices will increase, say, 100 times, then in an ideal free market there is a whole year to early adaptation to the predicted price jump. All enterprises and the population will also increase the price of their goods (machines, equipment, services, labor, etc.) by 100 times. Thus, no one will suffer significantly even from hyperinflation, and in the case of unpredictability, unexpected price increases of even 10% (moderate inflation, by our definition), a significant decrease in the profitability of the relevant enterprises may occur.

Types of inflation

inflation monetary reform shock

Depending on the rate (speed of occurrence), the following types of inflation are distinguished:

1) moderate (creeping) inflation;

2) galloping (jump-like) inflation;

3) hyperinflation.

Depending on the causes of inflation, there are:

1) demand inflation;

2) cost inflation;

3) structural and institutional inflation.

Depending on the nature of the manifestation, the following types of inflation are distinguished:

1) open inflation? positive growth in the price level in conditions of free, unregulated prices;

2) suppressed (closed) inflation? increasing commodity shortages in conditions of strict government control over prices. It is expressed in an increase in cash flow.

Other types of inflation:

1) balanced inflation? the prices of different goods change to the same extent and at the same time. Does not have any negative consequences;

2) unbalanced inflation? prices for goods grow unevenly, which can lead to a violation of price proportions. Unbalanced inflation brings great problems to the economy and business entities. With it, there is no possibility of forecasting product sales; it is impossible to say which product will become the leader and will be in demand. There is no way to calculate the most profitable areas where you should invest. Industry stops developing in such conditions. In our country and in the CIS countries there is unbalanced inflation. The rise in prices for raw materials occurs faster than the rise in prices for the final product; the cost of one element is more than the device itself;

3) expected inflation? allows you to take protective measures. Usually calculated by government statistics agencies. Does not have any negative consequences for the economy;

4) unexpected inflation. Its appearance cannot be calculated and predicted; it appears spontaneously and cannot be controlled;

5) imported inflation? develops under the influence of external factors.

Moderate inflation

Moderate (creeping) inflation (price increases of less than 10% per year). Western economists consider it as an element of normal economic development, since, in their opinion, slight 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 payment turnover, reduces the cost of loans, contributes to 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. The average inflation rate in EU countries in recent years has been 3–3.5%. At the same time, there is always a danger that creeping inflation will escape state control. It is especially great in countries where there are no proven mechanisms for regulating economic activity, and the level of production is low and is characterized by the presence of structural imbalances.

The inflation process can develop in two main directions. If macroeconomic disequilibrium towards demand is expressed in a constant increase in prices, inflation should be considered open. When it is accompanied by general government price controls, inflation becomes suppressed.

Since inflation is a macroeconomic phenomenon, it is characterized by an increase in national economic price indices. At the same time, in the economy of any developed country, situations very often arise when certain commodity markets experience a decrease in prices (or at least a slowdown in their growth). Why does this happen? There is only one explanation - moderate open inflation does not destroy market mechanisms. They continue to work, push investment, stimulate expansion of production and supply. And if so, then the fight against inflation becomes a task, albeit difficult, but still not hopeless.

Among the mechanisms of this form of inflation, first of all, one can highlight the one that is associated with the deformation of the psychology of consumers and producers. Inflation causes deep, radical changes in the psychology of the acquirer. Faced with a constant increase in prices, he gradually gets used to the idea: goods and services will never become cheaper and the whole question is to correctly predict how exactly they will become more expensive. Consumer decisions about what part of income to spend on current consumption and what to save are adjusted to such forecasts (adaptive inflation expectations).

It is clear that, trying to at least maintain his standard of living, the acquirer will increase current demand to the detriment of savings. This is exactly what, by the way, is happening in our economy, where adaptive expectations have become one of the main reasons for real consumer paranoia and the unbridled build-up of excessive demand, the leading link in the inflation mechanism. Manufacturers and traders, counting on higher prices, begin to slow down sales, hoarding the product, hoping to sell it at a higher price over time.

Creeping inflation is determined by insignificant rates of price growth - less than 10% per year. The second name for this type of inflation is regulated, because The government, using a variety of instruments, can influence market conditions and keeps monetary circulation under control. In such a situation, money retains its value because purchasing power remains relatively stable. Creeping inflation usually does not have a serious negative impact on the economy.

Galloping inflation is characterized by relatively high rates of depreciation of money. The price growth index for this type of inflation is 20-200% per year. Because of this, demand increases, and therefore acts as an additional factor in price growth.

Hyperinflation is characterized by astronomical rates of price growth, sometimes reaching several thousand percent per year. In such conditions, the gap between rising prices and increasing wages becomes catastrophic. The well-being of even the most affluent segments of the population is deteriorating. Hyperinflation indicates that the economy is close to collapse and that economic processes are uncontrollable.

Stagflation characterizes the development of inflation processes in conditions of economic recession and a depressed state of the economy. Stagflation is a new phenomenon associated with the cyclical development of the national economy and due to new conditions for the reproduction of capital and structural changes in the national economy.

Based on the degree of balance in price growth, a distinction is made between balanced and unbalanced inflation. With balanced inflation, the dynamics of prices in various industries relative to each other are unchanged, and with unbalanced inflation, the rate of price growth in various industries constantly changes in different proportions.

In terms of predictability, inflation is classified into expected and unexpected. Factors of surprise or predictability significantly influence the consequences of inflation.

There are two types of inflation:

open inflation;

suppressed inflation.

Inflation is an increase in the prices of goods and factors of production. But inflation does not mean an increase in prices in equal proportion and at the same time for all goods. That is why price indices are used to measure inflation or determine its absence. Several indicators are used to measure open inflation: the Paasche index, the consumer price inflation index and the gross domestic product (GDP) deflator.
General price index

The Paasche index is calculated using the formula:

where h is the price growth index for one year; , - prices for the same products, but expressed respectively in prices of the base and current years; - volume of production of this product in the current year.

To measure the inflation rate, use the following formula:

where is the growth rate of the average level of consumer prices; CPI i – consumer price index of the year under study (i=1, 2, …,n); CPI 0 – consumer price index in the year taken as the base year.

The consumer price index is calculated by comparing the cost of a certain set (basket) of goods in the year under study with the cost of the same basket of goods in the base year:

where CPI is the consumer price index; W 0 – the cost of the basket of consumer goods in the base year; W i is the cost of the basket of consumer goods in the year under study.

Having considered the essence of inflation, its types and measurement indicators, we will analyze the reasons causing inflationary processes. Among them, first of all, one should mention the lack of a well-thought-out long-term monetary policy designed to keep the commodity and money markets in a balanced state and allowing for short-term anti-inflationary measures. Consequences of inflation

Declining standard of living

Depreciation of savings

Increase in taxation