Inflation is traditionally regarded as the negative side of the economy. But this is not a fair assessment. Inflation is one of the most significant economic indicators. Even its relatively high rates may indicate that the national economy of a country is undergoing rapid development. But it may well be, of course, that inflation will not be accompanied by the most positive consequences and significant costs. Which of them can be considered the most probable?
The essence of inflation
Before studying the costs of inflation, let us first consider its essence. What approaches to understanding this term are common among Russian researchers?
Inflation is most often interpreted as a process that characterizes the depreciation of the national currency. The Central Bank or other institution issuing money is forced to inject more cash into the state’s economy, to “blow” it (the word Inflation means “bloating”), while the purchasing power of capital does not increase. In turn, the opposite process - deflation - is characterized by just the same increase in the purchasing power of the currency. The first process in most cases reflects a rise in prices, the second - a fall. There is also such a thing as disinflation - a significant slowdown in price growth, or stabilization of such.
The inflation rate is usually calculated in annual terms. The parameter under consideration is among the main characteristics of the state economy. The inflation rate is fixed relative to the previous year. That is, the price increase is estimated not relative to current, but in comparison with those that were fixed a year ago relative to the moment of their measurement.
Inflation criteria
The phenomenon under consideration is primarily characterized by systemic nature. Inflation should be observed over a significant historical period. It may well be that the price increase was provoked by some situational factor, and if it did not become a trend, then it cannot be a criterion of inflation. The measurement of relevant indicators should be comprehensive. It cannot be judged that there is a lot of inflation in the economy, based on indicators for several types of goods or services of the same type. Similarly, an economist should be critical of forming a list of relevant indicators.
Modern analysts, as a rule, take into account statistics on consumer prices. But it is important to recognize the non-inflationary reasons for the increase in the value of goods. The fact is that an enterprise can set higher prices for products due to an increase in its manufacturability and the emergence of particularly valuable consumer properties. In some cases, the adjustment in the value of goods may be related to the seasonal factor. Changes in the foreign exchange market, for example, the depreciation of the ruble, some experts also assess as a non-inflationary factor. The fact is that the price increase, formed due to the corresponding trends in the auction, can be replaced by a drop as soon as the currency rises again.
Inflation classification
It will also be useful, before examining the costs of inflation, to consider in which varieties it can be represented. There are the following main types of the phenomenon in question: moderate inflation, high, galloping, hyperinflation. Consider their specifics.
Moderate inflation is estimated at around 10% per year.These figures are estimated by economists as indicating the normal development of the national economy.
Galloping inflation is calculated in double digits. In some cases, it can be assessed as acceptable, but, as a rule, indicates problems in the economy, especially when it comes to a developed state.
High inflation is one that amounts to hundreds of percent per year. Almost always characterizes the economy as being in crisis.
Hyperinflation can be measured in thousands of percent per year. As a rule, it is observed in situations of not only the most acute economic, but also political crisis.
Inflation can also be classified depending on whether it is classified as a hidden or open type. In the first case, price increases are obvious. With hidden inflation, prices may not increase (or be controlled by the state), but at the same time, the actual amount of cash in the economy characterizes the depreciation of the national currency. As a rule, in the second scenario there is a shortage of goods.
Actual and expected inflation
There are two main schemes for the economic reflection of inflation - measuring its actual indicators or forecasting them. Consider their specifics.
In the first case, real inflation is recorded - that which is calculated on the basis of economic indicators for one or another parameter (if we are talking about prices, then individual commodity positions are taken into account), which are observed in the current year in relation to similar periods in the past. The dynamics of the corresponding figures may, in turn, influence the formation of economists' expectations regarding future price increases. But the inflation forecast can also be based on the analysis of other economic indicators - for example, the exchange rate, industrial production index, foreign trade indicators, characteristics of the credit market, etc. In some cases, expected indicators can be estimated based on the difference between the cost of indexed government securities and those that did not go through the appropriate procedure - subject to the same maturity dates. As a rule, inflation rates correlate with price increases for indexed securities relative to the characteristics of those for which no price adjustments were made.
Expected inflation is a parameter that, as a rule, is estimated by probabilistic criteria. But it is quite possible that indicators will be at the disposal of the economist, which will make it possible to calculate its fairly accurate values. Inflation forecast is extremely important for building a strategy of economic development of the state, the formation of a competent budget policy. Therefore, if we talk about the macroeconomic level of interpretation of price growth indicators, economists try to use the most effective tools for assessing economic indicators, as well as make cautious, conservative forecasts.
Inflation factors
Having considered the main types of inflation, we can also study the key factors that shape it. Among these are an increase in demand, a decrease in supply. In the first case, there is inflation of demand, in the second - supply. We study their specifics in more detail.
Regarding demand inflation - it can be triggered by an increase in certain expenses, for example, consumer, or by an increase in money supply. The phenomenon under consideration is considered generally positive for the state economy. The fact is that growing demand means that the population or enterprises have free cash that they are willing to spend on purchasing goods or services. This stimulates economic growth in those segments that are able to meet the corresponding demand.
Supply inflation arises from a reduction in the volume of goods on the market. As a rule, this is due to a decline in the production of certain types of products.Given the continuing level of demand, a shortage of certain commodity items may form, as a result of which their prices are most likely to grow.
Supply inflation, as a rule, characterizes the state’s economy on the negative side. The decline in production is usually due to crises in the country's economic system or a violation of corporate relations, the inability to deliver goods from one region to another, and the complexity of settlements between product recipients and suppliers. Note that both marked forms of inflation can be observed simultaneously in the state economy. Most often this is due to the fact that in some sectors of the economy there is a drop in supply, in others - an increase in demand.
Inflation and its costs: the effect of worn shoes
Now we can consider actually what inflation costs are. Modern economists distinguish their following list.
First of all, these are the so-called costs of worn shoes. Such an unusual term means that in the economy there are difficulties with the circulation of cash. Citizens, therefore, try not to hold a large amount of cash in their hands, preferring to place them on bank deposits or purchase securities. As part of the costs of worn shoes, two notable phenomena can be observed. Firstly, if a person places his proceeds on a bank deposit, then he will most likely not withdraw them, if, for example, he sees goods at an attractive price in the store, he will prefer to wait until his salary arrives.
The motivation in this case is the desire to maintain interest that accrues on the deposit. In the macroeconomic sense, demand is falling, which, in turn, can provoke a slowdown in the production of goods that are not too sold. The second factor that determines a person’s unwillingness to withdraw money from a deposit is the desire to avoid “slipping shoes” in the process of interacting with the bank: you will first need to get to or get to a credit and financial institution, then wait a queue, then go and spend cash in store. As a result, demand is likewise falling, which could provoke a slowdown in the production of certain goods.
Menu Costs
Experts highlight the so-called menu costs. Their essence is that, because of the need to often raise prices, sellers of goods are forced to spend time changing price tags, re-labeling, signing new contracts with suppliers and other actions related to the fact that the selling price of products has to be adjusted.
Microeconomic costs
The problem noted above is often accompanied by costs at the microeconomic level. The company may experience certain difficulties with the organization of production due to rising prices of suppliers. Similarly, difficulties associated with sales may arise due to an increase in the prices of transport companies and suppliers of logistics services.
It can be noted that the inflation costs considered by us can be observed even with its low dynamics. Another question is the extent of the corresponding effects of currency depreciation. Marked by us types of costs inflation can also vary among themselves in terms of their impact on the economy. However, not only they can be factors of certain changes in the economic system. Let's consider this aspect in more detail.
The impact of inflation on the economy
How do the marked costs manifest themselves, or when considering them in the context of the development of a national economy? It all depends on what type of inflation we are talking about.
The greatest danger to the state economy is, of course, hyperinflation. The fact is that with it, the costs in question become too large.As a result of this, money circulation begins to be regarded as not the most optimal for settlements. Enterprises refuse to pay in national currency and can switch to a more stable foreign one. Or they begin to practice barter payments.
Hyperinflation can lead to a sharp reduction in the real incomes of citizens and enterprises. The state economy will begin to experience a shortage of investment.
Socio-economic consequences of inflation
In the most obvious way, the consequences and costs of inflation can be observed in the socio-economic sphere. First of all, this may relate to the motivation of people living in the state to work effectively. Increasingly rising prices and not always keeping up with them salaries become a negative psychological factor. Inflation does not allow people to count on the formation of savings. Even when it comes to bank deposits, it is rarely the case that interest on them fully compensates for the general depreciation of cash.
The result of financial instability in the socio-economic sphere can be a political crisis. People cease to trust the state, and in this case there is a very high probability of a change of power in an unconstitutional way, moreover, with the direct participation of foreign policy players. Such a situation can most negatively affect the further development of the state as a sovereign political entity.
Inflation also negatively affects the development of productive sectors of the economy. Players of the industrial market that produce high-tech products without special prospects of domestic sales (due to the fact that the population does not have available funds to buy the corresponding products) can start to collapse production data and proceed to the production of low-quality, least technologically intensive products. This leads to a decrease in the competitiveness of the national economy.
High inflation, accompanied by the simultaneous impact of negative economic, social and psychological factors, also affects the entrepreneurial activity of citizens - people stop doing business, as a result of which the state's social burden increases. High inflation is becoming a big burden on the country's budget. The state has to compensate for the decrease or insufficient growth rate of income of citizens employed in relevant fields. Such actions compel the authorities to save on other important areas of budget financing - providing the army, implementing investment programs, and participating in international projects. As a result, the country is losing its prestige on the world stage, becoming unattractive to investors and partners.
Anti-inflation measures
So, we examined the main forms of inflation, identified key factors affecting its dynamics. Let us now examine such an aspect as measures to counter the corresponding economic trend. Before, however, talking about them, it makes sense to decide whether it makes sense, in principle, at a particular point in time to counteract inflation.
We have determined above that the phenomenon in question is completely normal for a capitalist economy. Even in the most developed countries there is inflation. Moreover, in some cases its high rates are an indicator of rapid economic development. Especially when it comes to demand inflation. This means that prices are rising mainly due to the fact that consumers have the money to purchase goods. And if the state begins to counteract inflation, then this may not have the best effect on the state of affairs of producers of relevant products that are in demand.
For economists involved in building an economic strategy at the level of political power, it is important to adequately assess the impact of inflation on business, correctly interpret certain trends in the market. But if a decision is made to counteract the relevant trend, then the measures implemented by the state can be as follows.
First of all, the actions of the authorities can be aimed at reducing economic costs inflation. This can be expressed in the provision of financial assistance to those business entities that suffer losses due to price increases.
Also, government actions may be related to the prevention of factors causing inflation. If we are talking about price increases due to increased demand, then the authorities can assist manufacturers of goods in the production of large volumes. If, in turn, inflation is caused by a decrease in supply, a deficit and a subsequent increase in prices, then the state can also try to stimulate the necessary production or to help fill the market with necessary goods. As an option - due to import. In both cases, the stimulation of production dynamics is most often carried out through investment or credit support. In the first case, the state can start financial subsidizing of business entities, and invest money in company assets.
In the second scenario, access to cheap credit lines is expected. In this case, a lot depends on the position of the Central Bank. If the Central Bank refinancing rate is too high, then loans will not be cheap either.
Improving labor efficiency as an anti-inflation measure
Modern economists believe that the state can compensate for any type of inflation by stimulating the growth of labor efficiency of citizens. Of course, a significant role in this will also belong to private structures. But the state has the power to help create the necessary infrastructure for this. And where possible, provide financial support for initiatives.
The fact is that increasing labor efficiency in most cases means wage growth. Which may well overtake inflation. Along with the term under consideration in the economy there is the concept of "real incomes of the population." In the event that they are above inflation, then the fact of rising prices may not play any role. In turn, the dynamics of the increase in the cost of goods may be low, but with a fall in citizens' incomes - much more noticeable than in the first scenario.
So, we examined what is inflation, reasons and the costs that characterize it. Moderate price growth is not always an indicator of problems in the economy. But with high inflation rates, the state in order to maintain social and political stability is likely to intervene in the relevant economic processes.
