Open inflation manifests itself in. Types of inflation. The concept and its essence
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.
Open inflation is characterized by a tendency towards higher prices. At the same time, open inflation is quite compatible with a slowdown in price growth or with their periodic decline in individual commodity markets. Despite the fact that open inflation significantly deforms the market mechanism, the latter continues to send price signals that appropriately guide sellers, buyers, and producers of goods and services. As long as the market mechanism is functioning, there remains hope for overcoming inflation.
In conditions of open inflation, there are two most clearly manifested mechanisms for unwinding the inflation spiral: adaptive inflation expectations and cost-push inflation.
Adaptive inflation expectations
Adaptive inflation expectations are associated with persistent uncertainty among buyers regarding the normal functioning of the price mechanism. This consumer distrust can be justified by the following scheme: rising prices → increasing sustainable inflation expectations → reducing the savings rate → increasing current demand → rising prices
The ongoing rise in prices provokes the population’s confidence that the funds they have may depreciate. In this regard, people begin to spend more money on purchasing consumer goods and reduce their cash savings. In such a situation, not only a sharp reduction in the share of current savings may occur, but also the involvement of previously deferred funds in trade turnover. The savings deficit will in turn hamper the growth of investment, production and supply of goods and services. As a result, there will be an increase in demand with the existing fixed supply, which cannot but cause a new round of price increases. So, a rise in prices provokes a new rise in them.
The scope of the adaptive inflation expectations mechanism is not limited only to consumers. The situation may worsen if manufacturers and traders, counting on higher prices, begin to slow down sales, hide goods, hoping to sell them at a higher price over time.
Adaptive inflation expectations are of a macroeconomic nature and are very difficult to regulate, which, as a rule, affects the economic situation with a considerable delay. This is due to the fact that they are long-term in nature and go beyond the scope of anti-inflationary measures, which, as a rule, have a short-term impact. In addition, adaptive inflation expectations lead to the depletion of savings, which represent an important source of financing capital investment. Reduced investment limits the possibilities for expanding the production of goods, which does not allow balancing supply and demand; on the contrary, the gap between them is widening, which causes further price increases.
The most dangerous thing about inflation expectations is that they give rise to the so-called inflationary psychology in people. Inflationary psychology appears in the public consciousness as uncertainty about curbing inflation grows. Inflationary psychology is a subjective phenomenon, but it is quite real and extremely dangerous, since it generates a vicious circle of self-sustaining inflation. It is extremely difficult to reverse inflationary psychology.
Cost inflation
Due to the fact that the price increase applies to one degree or another to the entire range of products, it will directly or indirectly affect costs.
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 arises of increasing profitability, 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 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 period of 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.
Inflation as a consequence of monetary expansion
Inflationary expectations caused by credit and budget expansion are associated primarily with unjustifiably high state debt and an increase in the state budget deficit. State credit and budget policy plays a decisive role in this process.
Failure of a loan to fulfill its functions occurs when debts or accounts payable are written off. In this case, such fundamental properties of credit relations as payment, repayment, urgency and responsibility are ignored, without which, in fact, it is impossible to talk about a loan. The cessation of reimbursement of accounts payable and payment of interest on loans means an increase in the corresponding amount of credit money. Happens like
would be a hidden issue of money. Instead of the money being used to repay the loan and pay interest, it is directed to the commodity market. The result is swelling (instead of contraction) of the money supply, which directly leads to inflation.
As a result, not only does inflation increase, but also conditions are created for the economic irresponsibility of economic entities, which become confident in forgiveness. At the same time, this means maintaining unprofitable, inefficient enterprises, which becomes an additional burden on the economy.
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.
As can be seen from the formula, this index can be used in a wide range: from a small number of products to their universal coverage. As a rule, this index has a high degree of aggregation, i.e. includes an extensive list of product groups. The calculation is carried out on the basis of data on the output volume in the current (researched) year, in prices of a given year and the year taken as the base. The ratio of the resulting products makes it possible to determine the influence of the price factor on the valuation of the manufactured product, i.e. measure the dynamics of price growth or inflation.
Consumer price index
To measure inflation, an indicator is used - the inflation rate, which expresses the growth rate of the average level of consumer prices over the period under study. In particular, to measure the inflation rate based on consumer price indices for one year, it is necessary to know these indices for the corresponding months of the current and previous years. This indicator can be used to calculate the inflation rate over a period of several years. For this purpose, consumer price indices for the corresponding years are calculated. 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.
The consumer price index is also called the cost of living index, which allows you to assess changes in real income of the population over time. Let us recall that nominal income is income expressed in monetary units (rubles), while real income is the amount of goods that can be purchased with nominal income. Therefore, the consumer price index is best suited to measure the cost of living of the population. But in this case, a careful selection of the goods of the consumer basket itself is necessary, which would allow them to be compared over time. The fact is that over the course of several years, let alone decades, in modern conditions relatively rapid changes occur in the lifestyle and needs of the population.
GDP deflator
In the future, gross domestic product (GDP) will be examined comprehensively. Here we just note that it represents the sum of the values of final goods produced by the national economy in one year. Gross domestic product, expressed in prices of the current (researched) year, is called nominal GDP. Real GDP is the product of a nation produced in the same year, but calculated in constant, unchanging prices, based on the prices of a certain (base) year.
To measure the price level in the economy as a whole, an indicator such as the GDP deflator is used, which is the ratio of nominal GDP to real GDP, expressed as a percentage:
where D GDP is the GDP deflator; GDP n – gross domestic product expressed in current year prices, or nominal; GDP p – gross domestic product expressed in base year prices, or real.
Due to the fact that GDP is calculated on the basis of all goods and services produced in the national economy, it most fully reflects the dynamics of the general price level in the economy and is less suitable for measuring the cost of living. At the same time, to measure inflation, the growth rate of the GDP deflator, which is also called the inflation rate, is often used:
where I n is the inflation rate; - GDP deflator in the period under study; - GDP deflator in the base year.
Thus, the inflation rate can be measured within the national economy as a whole using the growth rate of the GDP deflator and at the level of the daily needs of the population - using the growth rate of the average level of consumer prices.
While noting the great practical significance of using inflation indices, it is at the same time necessary to remember certain flaws and distortions associated with the use of these indicators. First of all, these indices may reflect price increases due to an increase in the quality and technical parameters of manufactured products, and therefore have nothing to do with inflation. Therefore, inflation indices may contain a non-inflationary component, which clearly leads to a distortion in the assessment of the inflation level towards its overestimation. True, in this regard there is a counteracting force, which is associated with rising prices under the plausible pretext of improving the quality of goods and services offered. We are talking about the frequent practice of inflating prices for certain goods in comparison with improving their quality characteristics.
The next remark concerns the degree of aggregation of a particular indicator. The GDP deflator has the highest level of aggregation, since it covers almost the entire range of products produced in the country. If noticeable structural changes occur in the national economy in a relatively short period of time, then, based on the indicators of the GDP deflator and the rate of its change, one can obtain a very distorted picture of the inflation taking place. In this regard, we must remember that with increasing aggregation of a particular indicator, on the one hand, an increasing amount of information is used, and on the other hand, there is an increase in distortions in it when using it.
Classification of types of inflation
The rate of price growth (price index) is one of the most important criteria in determining the type of inflation. Depending on the rate of price growth, moderate (creeping), galloping and hyperinflation are distinguished.
Creeping inflation
Moderate or creeping inflation is characterized by insignificant rates of price growth - less than 10% per year. It is also called regulated, since the government, using various levers, influences market conditions, keeps money circulation under control, sometimes deliberately stimulating, sometimes counteracting price increases. In such a situation, money retains its value because purchasing power remains relatively stable.
Galloping inflation
Galloping inflation is determined by the relatively high rate of depreciation of money. Conventionally, the price growth index for this type of inflation is 20-200% per year. This determines the desire of money owners to immediately materialize it, which acts as an additional factor in price growth, as demand increases. Transactions are concluded in close connection with rising prices.
Hyperinflation
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 the onset of collapse of the country's monetary economy and uncontrollability of economic processes. There is a rejection of contracts in monetary form, the share of barter transactions increases, the time comes for a return to elementary commodity exchange, and a transition occurs from the T-M-T formula to the T-T formula.
Stagflation
A special place is occupied by stagflation. It characterizes the development of inflation processes in conditions of economic recession and depressed state of the economy. The term itself comes from two concepts that characterize the simultaneous presence of the economy in a state of stagnation (curtailment of production, depression) and inflation. Stagflation is a fundamentally 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. A decline in production, crisis or depression, as a rule, was accompanied not by an increase, but by a decrease in prices. In the late 60s - early 70s. this trend was interrupted, which served as the beginning of stagflation processes, which manifested themselves with particular force in the world economic crises of 1974-1975. and 1981-1982
Balanced and unbalanced inflation
Based on the criterion of the ratio of price increases for various product groups, i.e., according to the degree of balance of price increases, a distinction is made between balanced and unbalanced inflation. With balanced inflation, the price dynamics in different product groups relative to each other are unchanged, and with unbalanced inflation, the rate of price growth in different product groups relative to each other constantly changes in different proportions.
Expected and unexpected inflation
In terms of predictability, inflation is classified as expected and unexpected. Expected inflation means that it is predictable, while unexpected inflation means, on the contrary, that it is unpredictable. Factors of surprise or predictability shed new light on the impact of inflation. If all market agents and the population know that next year prices will increase by a certain number of times, then they should prepare for this, based on the problems that arise for each participant in economic relations. In this case, the negative consequences can be significantly mitigated. If prices rise unpredictably and unexpectedly, even with moderate inflation, a noticeable deterioration in the economic situation in the country can occur.
The combination of balanced and expected inflation does not cause significant economic damage, but the combination of unbalanced and unexpected inflation can lead to a drop in production efficiency, distortions in its structure and cause unjustified redistribution of income and wealth.
Causes of inflation
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.
Cyclicality of economic development and inflation
The decisive role here is played by the central bank, which is called upon to pursue a balanced monetary policy and influence the state of the money market using a variety of instruments. The need for central bank intervention is also due to other factors, primarily the cyclical nature of economic development. This requires him to either increase or contract the money supply. When it comes to the expected decline in production, the need to lower interest rates on loans and increase entrepreneurial activity in the field of capital investment, the central bank takes measures aimed at saturating the market with banknotes. And, on the contrary, he is pursuing a policy to reduce the money supply in the context of the beginning “overheating” of the economy. In this case, high interest rates constrain the investment and economic activity of enterprises.
This also gives rise to trust in government authorities, which are pursuing a tough but balanced course to maintain not only monetary circulation, but also economic stability and economic growth. However, there are frequent cases of monetary policy turning into an instrument of budget policy and replacing strategic guidelines with short-term measures.
The implementation of long-term monetary policy cannot and should not be limited to the interests of the exclusively monetary economy. Otherwise, the most important sphere of economic activity will be out of sight - the production of goods and services, which represents the opposite pole of market equilibrium. Therefore, it is necessary to constantly monitor the impact of monetary policy on the real sector of the economy and make the necessary adjustments to ongoing measures, both short-term and long-term.
Structural imbalances and inflation
Closely related to the first cause of inflation is the second - structural imbalances in the national economy, which primarily cause unbalanced inflation. We are talking about disproportions in the production of consumer goods and means of production, or the release of goods for non-productive and production purposes, between industry and agriculture, the service sector and other areas of economic activity, production and infrastructure. This implies the need to objectively link the ongoing long-term monetary policy with the government’s structural and investment policy as an indispensable condition for eliminating national economic and inter-sectoral imbalances. This requirement, like no other, is obviously most suitable for the current situation in Russia, since the industries and industries that supply goods and services to the market are outside the scope of the interests of the monetary and economic policies of liberal monetary governments. It is possible to count on a favorable outcome when attention is paid to and appropriate measures are taken to support and stimulate the investment and production activity of enterprises, associations, banks, credit and financial institutions in order to expand the restructuring of the national economy and the supply of goods and services.
Demonstration of the erroneous policy of the Central Bank of the Russian Federation after the start of the crisis of 2008-2009. it should be considered that he set the discount rate (refinancing rate) at 13%, which corresponded to the inflation rate in the country. This indicated that the Central Bank behaved like a commercial structure that did not want to incur losses on lending, but not as a government body that was designed to promote the development of production and solve economic and social problems. By lowering the discount rate to 3-5%, the Central Bank would open up access to monetary resources for the real sector of the economy. Moreover, the real investment focus of lending could be carried out by the Central Bank of Russia through the largest commercial banks in the country under its control. This would contribute to an increase in demand for goods of both investment and consumer demand, an increase in employment and a reduction in unemployment, an increase in income and welfare of all market agents, and the funds lost by the state as a result of establishing a low discount rate would be returned to it with interest in the form of taxes in as a result of a significant increase in the sources of their income. There is a manifestation of the disease “monetarism” in the governing bodies of the Bank of Russia, which has had a negative impact on the economy, society, and the state.
Budget deficit and inflation
Another cause of inflation is the government budget deficit - the excess of government expenditures over government revenues. It has a serious impact on inflation processes. There are two main points here: the size of the budget deficit itself and methods for covering it. Inflation develops if it begins to be financed using inflationary methods. We are talking primarily about the issue of money, about the use of the printing press by the state. This is most easily feasible where the monetary system is directly subordinate to the executive branch and not the legislative branch (parliament). The growth of inflation is also provoked by government loans against securities and debt obligations that it receives from the central bank. However, if the government distributes loans among the population and business circles, then this affects inflation to a much lesser extent. But it contributes to inflationary processes, since such loans deplete the financial resources of the private sector, which leads to an increase in interest rates, which in turn can reduce investment activity. Compression of the investment process will lead to an undesirable reduction in potential production, which in the future cannot but affect the supply of goods and services, and, consequently, prices.
A clear example of such a situation in Russia is government short-term obligations (GKOs), the market of which reached 165 trillion rubles by mid-1995. The excessive development of this market with a growing federal budget deficit required more and more new issues of state bonds, since it was necessary not only to finance budget expenses, but also to pay off old debts, including huge interest. The unprecedented profitability on the GKO market (up to 187% per annum) determined that this market, like a whirlpool, began to suck in the monetary resources of all sectors of the economy, “bleeding” them. Moreover, budget money channeled through banks for lending to the real sector of the economy was used to purchase state bonds. Ultimately, all this placed an enormous burden on the shoulders of the population and the economy as a whole, which could not help but provoke inflationary processes.
Militarization of the economy and inflation
A significant factor in the development of inflationary processes is the militarization of the national economy and, in general, any para-production or quasi-production. This type of production includes any economic facilities, the functioning of which does not lead to increased saturation of the market with goods and services and does not contribute to maintaining the further process of reproduction. In a word, these are costly productions without any noticeable return in the form of goods and services. First of all, this includes long-term construction projects or mothballed objects. Both paraproduction and militarization affect inflationary processes with equal force, finding their manifestation in three most important moments.
Firstly, paraproduction and militarization increase the burden on the expenditure side of the state budget, which leads to an increase in its deficit.
Secondly, they are associated with a deformation of the structure of social production and a narrowing of the possibility of increasing the output of consumer goods as a result of the diversion of financial resources from commodity-producing sectors of the national economy. This, in turn, necessitates the search for new and significant sources of investment with the aim of further restructuring the economy and converting military production.
Thirdly, the expansion of the military industry and paraproduction causes additional demand in the consumer market due to the receipt of income by workers in these areas and the lack of adequate supply of necessary goods and services by these areas. Thus, a factor appears that introduces an imbalance between supply and demand.
International exchange and inflation
Inflationary processes in the national economy can be provoked through international exchange. This is done through two channels. The first is through the price mechanism of international trade, when rising prices for imported resources give new impetus to inflationary costs within the country. The second is through the mechanism of movement of short-term capital associated with national differences in interest rates. Higher interest rates cause an influx of capital from other countries, which is drawn into the sphere of circulation, thereby increasing the money supply. Consequently, higher interest rates, affecting the flow of short-term capital from outside, strengthen and accelerate the inflationary process.
Imperfect market structures and inflation
The inflationary process is largely influenced by the nature of the national economy and market. In particular, the dominance of monopolistic structures in the economy and the prevalence of imperfect competition in markets are the favorable environment in which inflationary trends are easily picked up and intensified. The monopoly position of enterprises allows not only to inflate prices, but also to simultaneously reduce production in order to further increase prices and maintain them at a high level. A clear demonstration of the effect of this inflation factor is the Russian reality of 1992-1993, when prices were released under the complete dominance of previously formed oligopolistic and monopolistic structures in social production. As a result, the rise in prices was accompanied by overstocking of enterprises and a halt in production.
Political instability and inflation
Finally, it is necessary to pay attention to the non-economic factor, which has a huge impact not only on the monetary economy, but also on the economic situation as a whole. We are talking about the presence or absence of political stability, which is manifested in the unpredictability of government behavior or the rapid change of one government to another. This situation causes a curtailment of investment activity and an increase in prices in order to cover the negative effects that may arise in the near future. Financial and credit institutions, in order to protect themselves from risk, inflate interest rates as much as possible and tend to limit themselves to short-term credit transactions, which leads to a “pumping” of bank money. On the consumer side, a massive “psychosis” of demand is beginning to make itself felt, due to the unpredictability of the country’s further socio-economic development. The weakness of the government also provokes forceful pressure on it from various social, professional, and business groups, which leads to even greater economic and political destabilization.
Consequences of inflation
Declining standard of living
Inflation negatively affects the well-being of the population. We are talking, first of all, about the fall in his real income as a result of the rapid rise in prices compared to the increase in wages. An unexpected and unbalanced rise in prices causes a redistribution effect among subjects of a market economy. In particular, if a collective agreement between an employer and a union is concluded for three years without due consideration of the possibility of sharp price increases, then workers may lose if the prices of consumer goods increase sharply and unexpectedly. An entrepreneur may also suffer if, in turn, the prices for his goods increase less than the prices for the material resources he needs.
When the open inflation mechanism operates, the growth of nominal incomes lags behind real ones.
In conditions of suppressed inflation, a reduction in real incomes of the population manifests itself in the emergence and growth of a commodity deficit, since people cannot fulfill their needs due to the lack of goods at reasonable prices in sufficient quantities, and turning to the black market leads to a decrease in real incomes.
Depreciation of savings
Inflation causes savings to depreciate. At the same time, quite often the rate of inflation not only negates the interest due on deposits, but also depreciates the value of the deposits themselves. In such circumstances, people prefer to transform savings into liquid cash. Opportunity cost, or opportunity costs, depreciate in these conditions, while the benefit from monetary assets increases significantly. However, the influx of monetary resources further aggravates the situation, since a change (increase) in demand causes an even greater increase in prices. A depreciation of savings on an unprecedented scale occurred in Russia during 1992-1993. The measures taken to compensate for the savings recorded at the beginning of 1992 represent nothing more than moral consolation (but not compensation in any way), because over these years prices have increased thousands of times.
Increase in taxation
The decline in the standard of living of the population is influenced by inflation taxation, which lies in the fact that with a progressive taxation scale, the indexation of income leads to the fact that increasing nominal income is gradually subject to higher tax rates. The taxpayer, against his will, moves into the group of citizens subject to a higher tax rate, which leads to a reduction in his real income. This allows you to increase the revenue side of the federal budget without changing the taxation system.
Curtailment of investment activities
In addition to the negative impact of inflation on the well-being of the population, it no less has a negative impact on production and economic activity in general. First of all, it is necessary to point out two aspects of restraining investment demand. Under the influence of inflation, depreciation occurs, on the one hand, of depreciation charges, and on the other, of the accumulation fund. As a result, both gross and net investments essentially “dry out” and do not allow the implementation of planned projects and activities related to the technical reconstruction of production, renewal and modernization of used equipment, and new construction. This leads to a restriction in the supply of goods and services.
At the same time, another source of financial resources is being depleted - the population and legal entities depreciate and withdraw their savings. In addition, in conditions of uncertainty and instability, the unwinding of an inflationary spiral significantly reduces the propensity to save, which also undermines the financial basis for the development and improvement of production. In addition, the rapid depreciation of cash savings pushes their owners to poorly thought-out and excessive expenditure of monetary resources, violation of inter-industry proportions, and theft of financial resources.
As for credit relations, since loan repayments occur at constant prices, creditors find themselves in a very difficult position.
Due to the fact that in the public sector, prices for both inputs and output goods are revised less frequently than in the private sector, it is technically difficult to regulate prices, let alone achieve price stability. As a result, the imbalance between the private and public sectors increases, and the state loses its potential and loses the ability to adequately influence the economy. This effect is especially dangerous during the transition from an administrative-command economic system to a regulated market economy.
Disruption of business and labor activity
Inflation significantly undermines the motivation for active entrepreneurial and labor activity. For business circles, especially in the production sector, uncertainty in the pricing mechanism significantly increases the degree of risk when implementing certain investment projects. At the same time, it is becoming increasingly difficult for them to obtain loans. This cannot but affect production and reduce the supply of goods and services.
As for wage earners, with high inflation, their income depreciates as a result of rising prices and a reduction in real opportunities for acquiring necessary consumer goods, and therefore the diligence and diligence of workers is significantly reduced.
conclusions
1. Inflation is the process of depreciation of money, caused by factors of both monetary circulation and the functioning of the real sector of the economy, i.e. it is a multifactorial phenomenon.
2. Inflation is divided into open, suppressed and caused by fiscal expansion. Open inflation manifests itself in rising prices and is implemented through the mechanisms of adaptive inflation expectations and cost-push inflation. Suppressed inflation manifests itself in a shortage of goods (or money, as in Russia in 1992-1998). It is characterized by a gap between market and administratively established prices, the absence of a price incentive to intensify entrepreneurial and labor activity, and cost inflation. The third type of inflation is associated with expansionary fiscal policy in the field of spending and limiting the performance of its functions by credit.
3. To measure inflation, aggregate price indices (Paasche index), consumer price index, which reflects the dynamics of prices for consumer goods, and the GDP deflator (GNP), which is the percentage difference between nominal and real GDP, are used.
4. Based on the rate of price growth, inflation is divided into creeping (price growth rate of up to 10%) per year), galloping (200%), hyperinflation (more than 200%), stagflation (price increases during an economic recession or depressed state of the economy).
5. The main causes of inflation include: irresponsible monetary policy of the central bank, cyclical economic development, structural imbalances in the economy, imperfect market structures, budget deficit, militarization of the economy and the presence of paraproduction, the influence of foreign economic factors, political instability in the country.
6. The main consequences of inflation are: a decrease in the standard of living of the population, a depreciation of savings, an increase in the tax burden, a curtailment of investment activity, and an undermining of entrepreneurial and labor activity.
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. Table 4.1 presents 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 period of 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.
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); f) 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 a fixed product basket becomes more expensive 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 of not reflecting 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 an increase in unemployment by 1% above the level of natural unemployment reduces real GDP compared 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.
From the point of view of manifestation, a distinction is made between “open” and “suppressed” inflation.
Open inflation
It is typical for market economy countries, where the interaction of supply and demand contributes to an open, unlimited rise in prices. Although open inflation distorts market processes, it still retains the role of prices as signals showing producers and buyers areas of profitable investment of capital.
Suppressed inflation
This is hidden inflation inherent in an economy with command and control control over prices and incomes. Strict control over prices does not allow inflation to manifest itself openly in rising prices. In such a situation, inflation takes on a hidden character. External prices remain stable, but as the supply of money increases, its excess causes a commodity shortage.
For a long time, the economy of the USSR was characterized by suppressed inflation, which was expressed in the growth of unsatisfied demand and monetary savings of the population, which were not realized. The savings rate in terms of income growth in 1969 was 50%, in 1976 - 79%, in 1984 - 100%. Savings were often forced; the inflation gap was 40%. The shortage gave rise to queues, a shadow economy, and incentives to work weakened.
As a result of suppressed inflation, the commodity deficit becomes the visible side of the invisible inflation process, since the same number of goods accounts for a larger number of banknotes. In a market economy, the imbalance would find a natural outlet in the form of rising money prices.
We can say that when inflation is suppressed, only part of the banknotes are money. Buyers, wanting to confirm the value of their money, try to find scarce goods. A “black market” appears - an illegal form of inflation in the context of its suppression. The “black market” to some extent shows the true prices of goods, and the illusion of constant prices creates the appearance of economic prosperity, misleading sellers and buyers.
Another criterion for the type of inflation is the rate of price growth. In this regard, there are three types of inflation:
- 1) Moderate inflation when prices rise by less than 10% per year, the value of money is preserved and there is no risk of signing contracts at nominal prices. In the West, it is viewed as an element of normal economic development that does not cause much concern. The average inflation rate in the countries of the European Community has been about 3-3.5% in recent years.
- 2) Galloping inflation- price increases are measured in double-digit or large numbers per year, contracts are “tied” to price increases, money quickly materializes. It is believed that it is dangerous for the national economy and requires anti-inflationary measures. Such high rates in the 80s were observed, for example, in many countries of Latin America and some countries of Central Asia. Hyperinflation- prices are growing at an astronomical rate, the discrepancy between prices and wages is becoming catastrophic, the well-being of even the most affluent sections of society is being destroyed, the largest enterprises are becoming unprofitable and unprofitable; it paralyzes the economic mechanism, since the effect of flight from money in order to transform it into goods sharply increases. Economic ties are being destroyed and a transition to barter exchange is taking place. Its conditional milestone is a monthly (over three to four months) price increase of over 50%, and the annual one will be expressed in four-digit figures. The peculiarity of hyperinflation is that it turns out to be practically uncontrollable; the usual functional relationships and the usual levers of price control do not work. The printing press is running at full capacity, and frenzied speculation is developing. Production is being disorganized. To stop or slow down hyperinflation, it is necessary to resort to emergency measures. But there is no clear idea of how exactly to combat hyperinflation. Various, often very contradictory, recipes are offered. In order to get ahead of the inevitable, expected increase in prices, owners of “hot” money strive to get rid of them as quickly as possible. As a result, rush demand unfolds; Those goods that can serve as a means of partially preserving savings (real estate, art objects, precious metals) are bought up first. People act under the pressure of “inflationary psychosis,” and this spurs price increases, and inflation begins to feed itself. A classic example of hyperinflation is the situation that developed in Germany and a number of other countries after the First World War. In Germany in 1923, price increases were in the ten and twelve figures; wages had to be spent immediately, because food prices increased several times during the day. Running a successful business in hyperinflation is almost impossible. It can only be a survival strategy. The recipe for self-survival is as follows: autonomy and self-sufficiency, simplification of production, reduction of external relations, naturalization of the basic elements of intra-company management.
Inflation is a very complex, unusually contradictory phenomenon. A direct analogy should not be drawn between price inflation and money emission, although this distinction is sometimes not made in the literature
Our definition of inflation as a process of depreciation of money and overflow of circulation channels with paper money does not fully exhaust the essence of this ambiguous phenomenon, which often has a significant impact on the general state of the economy. In some cases, even surgery is used.
