INFLATION
Measures
Types
Causes
Effects
Definition, Measures of Inflation
Inflation
is a phenomenon signalizing imbalance of economy
is a rise in the general level of prices, as measured against some
baseline of purchasing power
The prevailing view is that inflation is caused by the interaction of the supply
of money with output and interest rates.
Price index level
Expresses the level of prices of goods traded in economy at the same
time
Price index is calculated for particular market basket for examined
periods.
The change of price index level within time is the rate of inflation.
Measures of Inflation
Consumer price index (CPIs)
The most often used index
Measures the price of a selection of goods purchased by a "typical
consumer".
It is a statistical time-series measure of a weighted average of prices of
a specified set of goods and services purchased by consumers.
It is a price index that tracks the prices of a specified basket of
consumer goods and services, providing a measure of inflation.
The rate of inflation is determined as:
Other methods of inflation measurement are:
producer price indexes
wholesale price indexes
commodity price indexes.
% 100 *
1
t
t t
CPI
CPI CPI
r
=
+
Types of Inflation
Open inflation
if economic imbalance is accompanied with rising price level;
Suppressed inflation
if state authorities damp or even stop the rise of price level by
administrative means. But, by this way causes of inflation cannot be
removed. Such situation is followed by existence of scarce
commodities, shadow economy etc.
Hidden inflation
if official price indexes do not reflect the price of goods and services
produced by shadow economy.
Types of Inflation
from the quantitative point of view
Creeping inflation
the rate of inflation doesnt exceed the rate of production growth,
Creeping inflation is < 10%
Galloping inflation
the rate of inflation exceeds the rate of production growth, Galloping
inflation is from 10% to 100%. Money loose purchase power, people
hold as little money as possible.
Hyperinflation
is inflation that is "out of control", a condition in which prices increase
rapidly as a currency loses its value. Hyperinflation is over 100% per
year. Prices as well as wages are extremely erratic. Money have no
value and barter trade emerges (barter means the exchange of good for
good). Example: Germany after I.WW, Hungary after II.WW.
Causes of Inflation
Demand-pull inflation
Arises when aggregate demand in an economy outpaces aggregate
supply
It involves inflation rising as real gross domestic product rises and
unemployment falls. This is commonly described as "too much money
chasing too few goods".
Possible causes of demand-pull inflation:
Excessive investment expenditures
Excessive growth of consumption expenditures
Low-cost loans
Tax cutting
Augmentation of government expenditures
Causes of Inflation
Cost-push inflation (or supply-shock inflation)
is a type of inflation caused by large increases in the cost of important
goods or services where no suitable alternative is available.
A situation that has been often cited of this was the oil crisis of the
1970s, which some economists see as a major cause of the inflation
experienced in the Western world in that decade.
Possible causes of cost-push inflation:
Imperfect competition
Rising wages
Political incidents (like oil crises)
Causes of Inflation
Built-in inflation (or Anticipated inflation)
induced by adaptive expectations, often linked to the "price/wage
spiral
it involves workers trying to keep their wages up with prices and
then employers passing higher costs on to consumers as higher
prices as part of a "vicious circle.
Built-in inflation reflects events in the past, and so might be seen
as hangover inflation.
Effects of Inflation
Redistribution effect of inflation
Inflation affects recipients of fixed income firstly (nominal
incomes remain same but the real value of income drop)
Inflation affects the purchasing power of wages that dont follow
the rise of prices
Inflation causes diminishing value of loans and savings
Social impact of inflation
Socially poor persons suffer from inflation more then rich
Effects of Inflation
Impact on economy balance
Fall of real product bellow potential product
Changes in the structure of consumption (consumers are buying
cheaper goods)
In case of fixed currency exchange rate higher exports are incited
Inflation deforms prices
Inflation causes higher costs and makes economy less efficient
Creeping and anticipated inflation has positive effect on economy and
stimulates economic growth
High inflation and not anticipated inflation are serious problems in economy.
Stopping the inflation
There are a number of methods which have been suggested to stop
inflation.
Managing the wages and prices determined by state income
policy (authority can set wages ceiling)
Stimulating market competition e.g. antimonopoly regulations
Fiscal and monetary policy e.g. central banks can affect
inflation to a significant extent through setting interest rates
