Before considering the consequences of inflation, it is necessary to determine what its causes are and what kind of process it is, which governments of different countries have been forced to struggle with for many years. The economic literature offers well-defined definitions of inflation. The main one is as follows. Inflation is a process of overflowing circulation channels with an excess of paper money, because of which they become depreciated. The result of this process is their depreciation in relation to the monetary commodity - gold, as well as relative to the entire mass of ordinary goods on the market, to foreign currency, the value of which remains at the same level or depreciated not to such a strong degree.
General definition
It turns out that inflation is a monetary phenomenon, which is expressed in a continuous and steady rise in prices, coupled with an excess of a mass of money in circulation. This problem is peculiar to the situation when the cash availability of consumers and entrepreneurs exceeds the real need. In this case, business entities are aimed at getting rid of the surplus of cash that has arisen by increasing their own costs to reduce savings. In such a situation, the consequences of inflation will be such that demand will increase, prices will rise, and the purchasing power of money will fall - these are negative moments due to the fact that the state government chose the wrong policy in monetary matters, which can cause noticeable social and economic upheavals.
Interdependencies
The roots of this phenomenon are always hidden in the mistakes of the policy pursued by the state. The reasons can be highlighted a noticeable budget deficit, incorrect measures for the issue of money, as well as much more individually and in the mass. However, the effects of inflation are not expressed solely in rising commodity prices. That is, they cannot be reduced exclusively to the category of monetary phenomena. We can talk about the existence of such a phenomenon as the socio-economic consequences of inflation, which are expressed in the imbalance of reproduction in different areas of the market economy. The history of these processes is long and very rich, and now it is the most acute problem of the modern economic development of most countries on the planet.
Inflation: the nature, causes, consequences
Recently, economists have highlighted such a process as stagflation. It represents a simultaneous increase in the price level, reduction in production volumes, due to which the unemployment rate is growing. The stagflation process is directly dependent on supply and demand inflation. The reasons in this case are structural imperfections of the market, lack of competition, because there are no incentives for monopolies to reduce the cost of costs. It turns out that inflation and its social consequences in this case are very difficult to adjust. Many economists consider this phenomenon as a multifactorial one, opposing production growth and full-fledged economic development of the country. In the fight against it, one cannot count on a certain period of time and draw up an economic program, but it is necessary to fight constantly and continuously. These were the effects of inflation briefly, and a more detailed consideration will be given later.
The essence of inflationary processes
Economic practice is such that market entities not only must they comprehensively and competently measure this indicator, but also evaluate its consequences correctly in order to adapt to them. From this point of view, the structural characteristics of price dynamics come first. If we are talking about balanced inflation, then the price of goods increases, while maintaining an established ratio among themselves. At the same time, special attention is paid to the balance of their overall growth with labor market prices, so that real population income did not decrease, although the savings accumulated earlier will lose their force. The consequences of an unbalanced type of inflation are such that there is a redistribution of income, changes in the structure of production of services and goods, since the cost of different goods varies greatly relative to all the others in different proportions. The fastest-growing prices of everyday goods inelastic demand.
Economics and inflation
Some economists support the view that a negligible inflation rate (3-4%), accompanied by a corresponding increase in the money supply, leads to stimulation of production. The expansion will be the greater, the greater the number of unused production factors. Due to the growing mass of circulating money, the payment turnover is accelerating, and the activity of the investment plan is also activated. Production growth becomes the cause of the restoration of the equilibrium between the money supply and the commodity supply at an increased price level.
This process is controversial. The main consequences of inflation in this case are associated with an increase in cash profit, an expansion of capital investments, and also with an increase in prices, which leads to the depreciation of capital that is not in circulation. The winners are the companies that are the most powerful, equipped with advanced equipment, and also characterized by a perfect manufacturing organization. Social groups whose incomes are not fixed will live best if their nominal incomes increase at a rate exceeding price growth.
Cash and real income
It is important to understand what is the difference between cash, or nominal income, and real. The first is the amount of money a person receives in the form of wages, profits, interest, or rent. Real income implies the number of services or goods that can be purchased in the amount of nominal income. If you think about it, it will become clear that with an increase in nominal income at a more significant pace compared with the price level, we can talk about an increase in real income. And if the price level increases faster than nominal income, then we are talking about a decrease in real income.
In this case, the socio-economic consequences of inflation are such that with an increase in nominal income by 10% and an increase in prices by 5% per year, we can talk about a 5% increase in real income. It is important to understand that the mere fact of a decrease in purchasing power does not necessarily cause a decrease in personal real income or living standards. Inflation leads to a decrease in purchasing power, but this does not always cause a decrease in personal real income. This will happen only when the nominal income will lag behind it.
Expectation and Unexpectedness
The effects of inflation can vary markedly depending on how it affects distribution. In this case, she herself may be expected or unforeseen. In the first option, the recipient of the income has the opportunity to take measures to prevent the negative effects of inflation, which can affect real income. But this is a rather controversial issue, since usually, in order to avoid losses associated with the depreciation of money, producers, suppliers and intermediaries increase prices, which spurs further inflation.
The gain may be people who took money on credit, if the agreement does not indicate the dependence of interest on it on inflation. If the purchasing power of a monetary unit is reduced by half, the borrower will have to return to the bank an amount that has real purchasing power of half that size.
Hazardous species
Two-digit and three-digit inflation are the most dangerous types. In the context of the double-digit situation for most economic agents, difficulties arise in planning expenses and incomes, which is why economic activity is directed towards the most profitable and quickly recouped types of work, and a recession becomes most likely. The negative consequences of inflation in the case of the three-digit type may be associated with a gradual curtailment of economic activity in most economic sectors, which leads to the loss of almost all economic agents.
Inflation and income
Inflation and its social consequences hurt most people who receive a relatively fixed nominal income. It turns out that it leads to a redistribution of income, which is why recipients of fixed income are in the loser in favor of other groups of the population. If a person lives on fixed incomes, then he can benefit from this process. For such groups of the population, nominal incomes are able to exceed price levels or the cost of living, due to which their real incomes will increase. Workers employed in developing industries and represented by powerful unions have the opportunity to ensure that their nominal wages match or exceed inflation.
Some wage workers also suffer from these processes. If they operate in unprofitable areas of industry, are deprived of the support of trade unions, then they may become victims of a situation with overtaking growth in the price level in comparison with cash incomes. Managing firms and other beneficiaries benefit from inflation. With higher prices for finished products at a faster pace than the cost of resources, one can talk about an increase in cash receipts of firms at a faster pace than costs.
The consequences of inflation. Anti-inflationary policies and taxes
If you preliminarily calculate and trace the consequences of these processes, you can prepare and redistribute or plan nominal income so that a change in the price level does not hit the employee hard. Another element of costs in this process is the difficulty of adapting the tax system. And there are two problems.
An increase in the price level leads to an increase in the share of tax payments in the total mass of real income, which is why a progressive increase in taxes is noted. If taxes would always be in a certain proportion to nominal incomes, then the problem would disappear, since people would pay a fixed percentage regardless of their own profits.
The second problem is related to taxation of capital. Here and so there is the task of determining whether to tax profits on income, or to use a rate specially selected for this. And when inflation occurs in the economy, everything becomes more complicated, because the growth of capital, coupled with an increase in the value of assets in the market, gives a more rapid response to inflation compared to real profit. So far, no country has achieved success in solving this problem. The consequences of inflation in this case are briefly such that there is an increase in the actual taxation of capital. And in this, many economists see the main problem.
findings
Having formulated certain concepts and consequences of inflation, we can say that this is a complex process that requires a comprehensive review, and not a one-sided approach.
