Inflation (from the Italian “inflatio”, which means “inflation”) is a steady trend of growth in the general level of prices. Two concepts play an important role in this definition:

• stable rising prices. That is, inflation is a long-term process extended over time, so any short-term price jumps do not apply here;
• general price level. That is, we are not talking about an increase in all prices. The cost of certain groups of goods may remain unchanged or even decrease. We can talk about inflation if it increases general price index.

If we talk about the types of inflation, we distinguish: moderate, galloping, high, hypertrophied forms.

Types and types of inflation

Depending on the criteria, several groups of types of inflation can be distinguished.

For example, if you select the inflation rate as a criterion, the list will be as follows:

• moderate. The inflation rate is no more than 10%, usually 3-5% per year. Normal level for a modern economy;
• galloping. The rate of this type of inflation is expressed in double-digit percentages. Considered a major economic problem;
• high. Can be 200-300% or more. Typical for developing countries and countries with economies in transition;
• hyperinflation. Can reach more than 1000% per year.

If we choose the form of manifestation of inflation as criteria, we can distinguish such varieties as:

1. Open. It manifests itself in the rise in prices, which we clearly see;
2. Depressed. It manifests itself in the form of a shortage of goods when the government sets prices at a level below the equilibrium market level.

Open inflation

Open inflation is one of the types of inflation, which manifests itself in a general rise in prices. The open form does not introduce an imbalance into market mechanisms: rising prices in some markets are offset by their decline in others. This can be explained by the continued operation of market mechanisms that send price signals to the economy, stimulate the expansion of supply and production, and push investments.

Open inflation is a completely natural phenomenon in the world economy, which contributes to the development of markets, so there is no need to fight open inflation, but it must be kept under control, since an uncontrolled increase in the price level can weaken the economy.

Consequences of inflation

The consequences of inflation are manifested in both the economic and social spheres.

1. In conditions of inflation, real incomes of the population decrease. People with a fixed income receive a particularly strong “blow,” since the same amount can buy fewer and fewer goods every month.
2. Inflation leads to a decrease in real savings in the form of money, depreciating personal savings.
3. Inflation contributes to social stratification.
4. In conditions of inflation, a phenomenon such as a “flight” from money is often observed, which is an accelerated materialization of finance (money is quickly transferred into services and goods), which, in turn, stimulates production and contributes to economic development.

Causes of inflation

There are two clear causes of inflation:

• increase in aggregate demand. In this case we are talking about demand inflation. An increase in aggregate demand can lead to either an increase in any component of aggregate spending or an increase in the supply of money. The main reason for this type of inflation is an increase in the money supply;
• reduction in aggregate supply. It is the result of costs, which leads to stagflation, a simultaneous increase in the price level and a decline in production.

Hidden inflation

Hidden inflation is one of the types of inflation in which prices and incomes of the population remain unchanged, but there is an increase in the money supply or production costs. In other words, it is the gap between government-set and market prices.

Hidden inflation is a consequence of strict government control of markets. If the state sees that rising prices can lead to catastrophic consequences, it suppresses it: but in this case we are talking about eliminating the consequences, not the causes, and often ends in a shortage of goods: it is simply unprofitable for producers to produce and sell goods at prices below their adequate cost .

Commodity inflation

In most countries of the world, commodity inflation is the most important macroeconomic indicator that determines investment and consumer demand, interest rates, exchange rates, and many social aspects, including the quality and cost of living.

The state’s ability to keep inflation at an optimal level allows us to speak about the efficiency of the economy in the country, about a fairly high degree of development of self-regulation mechanisms, about the dynamism and stability of the economic system. Inflation at an optimal level (up to 10% per year) is useful for the country’s economy, as it stimulates commodity-money relations, the production of various goods, and so on.

Economic inflation

Economic inflation is always accompanied by rising prices, but rising prices are not always a form of inflation. Prices may rise due to crop failure, cyclical fluctuations, energy crisis, and so on.

The reasons for inflationary price increases include monopolistic price races, covering the state budget deficit with the help of additional money issues, inflationary expectations, and so on.

In the global economy, two parameters are traditionally used to describe the level of inflation: the gross national product deflator and the consumer price index.

Inflation - this is the depreciation of money, a decrease in its purchasing power. Inflation manifests itself not only in rising prices. Along with open price inflation, there is hidden or suppressed inflation, which manifests itself primarily in a shortage of goods and services at constant prices or non-payment of wages on time, which means their subsequent payment in depreciated money. Not every price increase is an indicator of inflation. Prices may rise due to improved product quality, worsening conditions for the extraction of fuel and raw materials, and changes in social needs. But this will, as a rule, not be inflationary, but a logical, justified increase in prices for individual goods. The most common cause of inflation is a lot of money, few goods; consumer demand exceeds product supply. There is usually not one reason for rising prices, there are several of them. Inflationary price increases may be based on various, usually interrelated, factors. At the same time, the scale, nature, and rates of inflation change. Causes: 1) money emission not covered by the mass of goods. 2) budget deficit. 3) militarization, which entails: a) an increase in budget expenditures; b) additional absorption of material and labor resources, and => withdrawal from the production of consumer goods; c)increasing consumer demand from those employed in the defense industry; d) monopolization of enterprises; e) taxation mechanism (with an increase in profit tax, a tendency to decrease production volumes appears); e) price markup inflation (increase in prices in order to compensate for future losses possible as a result of organizational restructuring of the state’s economy). Types: 1. Open inflation, har-sya:a) constant increase in prices. b) the action of the mechanism of adaptive inflation expectations. There are: 1.demand inflation, i.e. caused by an increase in prices on the part of economic agents in response to increased demand. 2. cost inflation, i.e. caused by an increase in prices by business agents to cover higher expected costs. With open inflation in the economy, an inflationary “wage-price” spiral arises, in which an increase in wages generates an increase in prices, which in turn leads to a further increase in prices and wage rates. 2. Suppressed Inflation, characterized by: 1. Temporary freezing of prices and incomes. 2. Establishment of maximum prices for products. 3. Total administrative control over prices. A sign of suppressed inflation is administrative price controls and deficit expectations of consumers. 3. Creeping– a price increase of 3-5% is not accompanied by a crisis shock. 4. Galloping – difficult to manage, average annual price increases from 10 -50%. 5. Hyperinflation– characterized by a very high rate of price growth, the level of which can exceed several hundred percent per year. During hyperinflation, consumer behavior is determined by the desire to invest money in material assets. There are threats to countries dependent on foreign trade imported inflation. It occurs when prices for imported goods increase, subject to exchange rates. Stagflation– a combination of inflationary processes with a simultaneous decline in production. Inflation indicators are price indices- relative indicators characterizing the price relationship over time. The price change index for one specific product is calculated: IP t =P t /P t -1, where P t, P t -1 is the price of the product in the current and previous periods. If we need to calculate the price ratio for a set of goods, then the calculation of the corresponding indices becomes more complicated. Two methods are used for this. One of them is based on the use of the Laspeyres index: the prices of the current period and the base period for the same set of goods (q 0) are compared. This index shows how much more expensive a fixed product basket becomes in the current period. I L =∑p 1 q 0 /∑p 0 q 0 . Another method relies on the use of the Paasche index. It shows how much more expensive or cheaper the fixed product basket of the current period is than in the base period. I p =∑p 1 q 1 /∑p 0 q 1 . These indices have the disadvantage that they do not reflect shifts in consumer product baskets. To more accurately reflect the dynamics of prices and, accordingly, the dynamics of the cost of living (the real costs of consumers for the purchase of certain sets of goods and services), the Fisher index is used: I f =√I L *I P .

Question 34. Unemployment, its measurement and role in the economy. Okun's Law. Phillips curve. The unemployed are the part of the adult working population that does not have a job and is looking for one. Employment experts highlight: 1.Friction b covers employees who are in the process of moving to a new place of work. In this case, the requirement for radical retraining is not put forward, since their professional qualification indicators correspond to the requirements of the labor market, and the field of activity does not change. 2.Structural b is long lasting and stagnant. This is due to the fact that the structure of the economy is constantly changing, for example, some unprofitable mines are closing. 6. Cyclic b, arising as a result of a fall in labor demand and an increase in supply due to economic downturns. 7.Seasonal regularly occurs at certain times of the year, for example, in agricultural winter. Unemployment rate = (number of unemployed/(number of working population-inactive population))*100%. Okun's Law- dependence between the norm unemployment and growth rates GDP, assumes that a 1% increase in unemployment above the natural unemployment rate reduces real GDP relative to potential GDP by 2.5%. Named after the American economist Arthur Oaken.

(Y − Y *) / Y * = − B(u *)

Y-actual GDP; Y* - potential GDP; u*-cyclical unemployment rate; B is the empirical sensitivity factor (usually assumed to be 2.5%). A special case of Okun's law: ( Y − Y *) / Y * = 3% − 2% * (u − u*); Y and u - in the current year; Y* and u* - in the previous year. The relationship between unemployment and inflation. Phillips curve. Inflation has a strong impact on employment. In 1958, the English economist A. Phillips proposed a graphical model of demand inflation. Using English statistical data for 1861-1956 in his work, he constructed a curve that clearly shows the inverse relationship between changes in wage rates and the unemployment rate. Phillips concluded that the government could use increased inflation to combat unemployment.

We invite you to familiarize yourself with such issues as the essence, types and causes of inflation. Agree, they are very relevant today. Levels of inflation, types of inflation, measures to combat it - all this has been actively discussed in recent years in connection with the current situation in the global and Russian economy.

What is inflation? This is a crisis state of a particular monetary system. This term itself arose in relation to money circulation in the mid-19th century. It was introduced in response to the massive issuance of paper dollars during the United States Civil War (1861 to 1865). Inflation, the causes, types and essence of which we are interested in, has long been understood as an increase in commodity prices and the depreciation of money. It was considered a monetary phenomenon. However, modern inflation is also associated with the general unfavorable state of development of the economy of a particular country, and not just with a decrease in the purchasing power of its monetary unit.

What does inflation lead to?

In an economy that is functioning normally, there should not be a significant increase in prices, that is, depreciation of money, meaning inflation. Inflation leads to a decrease in the purchasing power of money, as well as an increase in prices for services and goods. At the same time, prices for individual types are growing unequally.

"The Age of Inflation"

According to economists, civilized countries have entered the so-called “age of inflation” over the past 30 years. Today, inflation of 2-3% is considered a normal phenomenon of the global market economy.

Some causes of inflation with examples

Almost all countries have many reasons leading to inflation. However, in each case, the combination of factors in this process depends on specific economic conditions. For example, in Western Europe immediately after the end of World War II, inflation was associated with acute shortages of many goods. Subsequently, government spending, the wage-price ratio, the transfer of inflation from other countries, as well as some other factors began to play a major role in promoting this process. If we consider the former USSR, then here, along with some general patterns, one of the main causes of inflation in recent years can be considered a unique disproportionality that arose in the economy as a result of the functioning of the command-administrative system. Long development in wartime regime (according to some data, the accumulation rate reached half of the national income, while in Western countries it was only 15-20%), high degree of monopolization of the monetary system, distribution and production, low share of wages in the national income fees, as well as some other features were inherent in the Soviet economy.

Hyperinflation, galloping and moderate inflation

There are different types of inflation. The most common is the following three types:

• hyperinflation, in which prices rise by more than 200% per year;
• galloping inflation (per year from 20 to 200%);
• moderate, which is accompanied by their growth of no more than 10% per year.

Galloping, and even more so hyperinflation, is considered extremely undesirable. These types of inflation lead to severe economic and social consequences.

Suppressed inflation

There are other divisions. For example, there are such types of inflation as open and suppressed. Suppression is possible only under strict control by the state. It is characterized by demand-side inflation, which arises as a consequence of excess aggregate demand (aggregate expenditures) under conditions in which employment is close to full. Suppressed inflation thus manifests itself in worsening shortages of goods.

In our country, such a process was observed in the 80s. In addition to the deficit, during this period the inflationary process was also characterized by the fact that, at constant prices, the quality of products deteriorated, and unjustified shifts in the assortment were observed (a reduction in the production of cheap goods and an increase in the production of expensive ones). Instead of one imbalance at the beginning of the 1990s (few goods - a lot of money), another one arose. The shortage of money led to a drop in demand, and then to a decrease in production. The problem of non-payments has worsened. The state delayed the payment of wages to many people. It could also not fulfill its obligations for the supply of agricultural products and fuel, and for defense orders. Strict financial regulation has reduced investment and undermined incentives for output growth.

Types of open inflation

It distinguishes the following varieties:

• cost inflation;
• stagflation;
• inflation of adjusted expectations.

The first is characterized by an increase in wages, which drives up the rise in prices for services and goods (it significantly outpaces the growth of wages). Stagflation occurs when there is a simultaneous reduction in production volumes and an increase in prices. The last type of open inflation occurs when the economy is in a situation of constant expectation of rising prices. Because of this, consumers increase their consumption of services and goods, which means their prices rise.

Creeping, galloping and hyperinflation

The following types of inflation are also distinguished, depending on the rate at which prices in the market are growing.

1. Creeping observed when the rate of price growth annually is 3-4%. It is typical for the economies of developed countries and is a stimulating factor for these countries.
2. WITH galloping We encounter inflation when the average annual growth rate of prices for services and goods ranges from 10 to 50% (sometimes reaching 100%). It predominates in developing countries.
3. Hyperinflation observed when the rate of price growth increases annually by more than 100%. It is characteristic in certain periods of various states experiencing a radical change in their economic structure.

However, we have not considered all types and forms of inflation. We offer another classification of them.

Cost and demand inflation

The following types and types of inflation can be distinguished depending on the cause: inflation of production costs and demand. The latter is a functional type, characterized by an increase in aggregate market prices due to an increase in monetary demand for services and goods of the aggregate consumer (buyer), as well as its “separation” from the aggregate supply. It traditionally occurs when there is excess demand. Considering the types and types of inflation, we note that demand inflation can be due to various reasons.

Causes of demand inflation

It may be due to:

1. Militarization of the economy, as well as increased military spending. The fact is that military products and military equipment do not function on the market. The state acquires it and then sends it to reserve. No money is required to service this product, since it does not change hands.
2. Growing public debt and budget deficit. Either by issuing banknotes or by government loans, the budget deficit is covered. This creates additional funds for the state, and therefore additional demand.
3. Also, demand inflation may be due to credit expansion of banks. The fact is that the expansion of credit operations of these institutions leads to the fact that credit instruments of circulation increase, which creates additional demand for services and goods.
4. Another reason - influx of foreign currency into the country, which, as a result of its exchange for the monetary unit of a given country, causes an increase in the volume of money supply, and therefore increased demand.

Thus, demand-pull inflation occurs only when an increase in the price level occurs as a result of an increase in aggregate demand.

Let us now move on to consider cost-of-production inflation. Among its reasons are the following.

Causes of production cost inflation

1. Decreased labor productivity, which causes structural changes or cyclical fluctuations in production. They lead to higher unit costs, which means lower profits. This will ultimately affect the reduction in the volume of a particular production, which means a reduction in supply and, naturally, an increase in prices.
2. Another reason - expansion of services, the emergence of new types with an increase in the share of wages and labor productivity, which is relatively low in comparison with production. This leads to a general increase in prices for various services.
3. You can also highlight high indirect taxes included in the cost of goods, which means an increase in the overall level of costs.
4. Another reason - increase in wages under certain circumstances(for example, an increase in the minimum wage). For such growth, companies are responsible for an inflationary spiral. Price increases, as well as new salary increases, follow the initial increase.

Measures to combat inflation

Surely you are interested not only in the main types of inflation, but also in how you can combat this phenomenon. The main ways to combat it are the following: anti-inflationary policies and monetary reforms.

Currency reform is a partial or complete transformation of the monetary system in the state, which takes place with the aim of strengthening and streamlining monetary circulation. The set of measures to regulate the economy that the state carries out in the fight against inflation is called anti-inflationary policy. Its main ways are as follows:

• regulation of money demand, using the tax and monetary mechanism by limiting the money supply, increasing the tax burden, increasing interest rates in lending, reducing government spending, which leads to a slowdown in economic growth;
• income policy, in which there is parallel control over wages and prices by completely freezing them or limiting their growth, the implementation of which can cause social contradictions.

So, you have learned what the levels of inflation are, its types and measures to combat it. Of course, inflation in the modern world is a very common phenomenon. Each of us involuntarily faces its consequences, whether we want it or not. Therefore, knowledge of topics such as the concept and types of inflation is necessary for everyone.

Modern inflation arises in an unbalanced money market and acts as an increase in the general price level. This is the essence of open inflation, inherent in economic systems with developed market economies and entrepreneurship. Inflation does not mean that all prices necessarily increase; some may remain stable or even decrease. However, in any case, it becomes increasingly difficult for money to perform its functions, to service the circulation of goods and services, payment transactions and the process of accumulation.

The inflationary money supply penetrates the economy and begins to concentrate on the side of aggregate demand. If these processes become regular, then a stable gap arises between aggregate demand and aggregate supply. Thus, inflationary processes reflect, first of all, a violation of macroeconomic equilibrium. A gap is forming between increased investment demand and lower supply of savings. As a result, the growth of investment and production in the economy slows down, and the rate of economic development falls. Increased current demand causes a shortage of savings. The economy responds to all these imbalances by increasing the general price level.

Let us formulate the definition of open inflation. Inflation is called open if macroeconomic disequilibrium towards demand is expressed in a constant increase in the general price level. Open inflation does not destroy market mechanisms: simultaneously with rising prices in some markets, they are observed to decline in others. In Fig. 4.1 presents the types of open inflation.

Suppressed inflation

Suppressed inflation manifests itself under conditions of restriction of the market mechanism and the introduction of administrative regulation of economic processes. It manifests itself most clearly in countries whose economies operate on the principles of centralized directive planning and strict administration of market relations.

*Price gap

The first sign of suppressed inflation is the gap between administratively established and market prices, or equilibrium prices. Externally, prices look stable, especially since the state is the guarantor of their stability. However, if there is a shortage of certain goods, then part of the commodity mass flows from the administratively regulated market to the so-called black market. Speculation ensues. In fact, through unofficial flows of commodity-money supply, compensation occurs for the unbalanced official market. As soon as administrative restrictions in the field of pricing are lifted, a surge in price growth occurs and a market equilibrium is established between supply and demand. At the same time, the problem of double standard prices and the problem of speculation are removed, because the latter ceases to be such and acquires the character of a legitimate commercial activity. Suppressed inflation also manifests itself in countries with market economies in the form of temporary freezing of prices and incomes or the establishment of their upper limits.

Suppressed inflation is characterized by the presence of certain methods of administrative regulation of prices, which lead to deformation of the market mechanism. The depth and duration of such deformation depend on the forms in which this regulation is carried out.

*No price incentive

Another manifestation of suppressed inflation is the lack of price incentives to expand production and increase supply, which causes underproduction of those goods and services that are in demand. In conditions of constant prices, the problem of increasing profitability arises, since the increase in profit is limited from above by the level of established prices, and from below it is under pressure from rising wages. In such a situation, entrepreneurs and employees begin to lose interest in increasing labor productivity and increasing the volume of output. Under these conditions, the employee’s psychological principle begins to work: “as you pay, so I work.”

In its consequences, this manifestation of suppressed inflation goes far beyond the scope of purely economic processes, because it is associated with the formation of a special socio-psychological climate, which manifests itself in the loss of work culture, indifference to the state of affairs not only at the enterprise, but also directly at the workplace, and also in the growth of irresponsibility and wastefulness. All this ultimately leads to the disorganization of production with all the ensuing consequences.

*Specifics of the manifestation of cost inflation

The next mechanism for the development of suppressed inflation is its combination with cost-push inflation. The development of this kind of situation is most clearly manifested in the conditions of a double standard pricing mechanism. This kind of situation arises when some of the industries and spheres of the national economy are subject to strict regulation in their economic activities, and primarily in relation to pricing, while another part of them has relative economic freedom and is guided in their activities by market mechanisms

functioning of the economy. At the same time, the existing cost-push inflation as a manifestation of open inflation in zones of relative economic freedom has a significant impact on the growth of costs and expenses in all sectors of the economy, but the most negative consequences affect sectors that experience the pressure of administrative prices set and controlled from above. Ultimately, this leads to a curtailment of production and suppression of economic interest in intensifying economic activity.

*Consequences of suppressed inflation

The above mechanisms of suppressed inflation create an economy of chronic commodity shortages. As the practice of combating commodity shortages using command and administrative methods has shown, eliminating the shortage of some goods is accompanied by the formation of a shortage of others. In addition, shortages may even be accompanied by overproduction of products, since consumers, having the opportunity to purchase a product, refuse to buy it due to low quality.

Ultimately, we can conclude that all three directions of the deployment of suppressed inflation are focused on the formation of deficit inflation expectations, which have the most detrimental impact on the economy. Scarcity expectations manifest themselves in powerful surges of rushing current demand, dictated not so much by forecasts that goods will become more expensive, but by fears that they will not exist at all. In such cases, literally all goods are “swept away,” purchased for future use, in anticipation of a reduction in their supply with a simultaneous increase in their prices. We could observe this situation in the early 90s. in their own country in anticipation of the transition to a market economy. We got a “cross” inflationary effect, because the surge in expected demand was caused, firstly, by the expected curtailment of production, secondly, by the expected “explosion” of prices, and thirdly, by guessing the inevitability of the depreciation of savings.

It must be especially emphasized that administrative control over prices is not an absolute evil. In countries with highly developed market economies, such control is established over the prices of goods of monopolistic enterprises, regardless of their form of ownership, as well as in order to provide support to certain industries or areas of economic activity (for example, agriculture). Moreover, it is hardly possible to do without it during the formation of a modern market economy, especially if this applies to such an over-monopolized economy as ours. The presence of monopolistic and oligopolistic structures objectively determines the need to use administrative methods of state intervention in the economy.

Open inflationis familiar to every person who lives in a country with a developed market economy. This phenomenon allows citizens and entrepreneurs to realistically assess the situation and quickly adapt to ongoing economic changes.

Open inflation - how is this phenomenon characterized?

An imbalance between the money and commodity supply causes inflation. In countries developing in a market economy, this process is not controlled by the state, so the cost of the food basket is constantly increasing. Economists call this phenomenon open inflation.

Open inflation is characterized by an increase in the prices of goods and services immediately after demand begins to exceed supply or production costs increase. This process is not hampered by government laws, and manufacturers have the opportunity to set the prices that are most profitable for them.

Don't know your rights?

However, with open inflation, consumers can still plan their spending. They expect prices to rise over a certain period of time and make purchases that keep money in circulation.

But it was not always so. In Soviet times, the state regulated the cost of the consumer basket, and people could buy goods at the same price for a long time. But this does not mean that there was no inflation in the country - there was, but it was carefully hidden by the state.

Should we be afraid of open inflation?

Freezing prices for a long time can lead to unpleasant surprises. After all, when people accumulate money and get used to constancy, any economic changes can cause serious upheavals. With an open form of inflation, each person understands what is happening to the country’s economy and realistically assesses their capabilities.

It is much easier for production to develop with open inflation. Companies can set prices for goods and services depending on their costs and market prices, and if they have to spend more money to produce goods and services, they can compensate for this by increasing tariffs. Therefore, as many goods and services can be brought to the market as they can be consumed. At the same time, people can also buy everything they need at any time if they have the money for it. And they know for sure that having saved a certain amount in a short period of time or taken out a loan, they will find the required product on sale.

Thus, one should be afraid of open inflation, since an increase in the price level weakens the economy of any country, but at the same time, this phenomenon allows people to realistically assess the situation and plan their expenses. And entrepreneurs always have an incentive to develop their business.