Inflation of demand, supply and inflationary spiral

Inflation is an increase in the general level of prices of all things and services. It, like unemployment, is caused by the violation of certain economic proportions at the national level. Therefore, its consequences affect all citizens of the country without exception. This phenomenon can have different causes, depending on which there are two main types: supply inflation and demand inflation. Let's see what these species represent, and how they interact with each other.

Inflation of demand occurs when the push to increase the general level of prices gives factors on the side of aggregate demand. The aggregate supply remains unchanged. With this state of affairs, production is not in a position to react to excess cash by increasing its output. Thus, demand begins to significantly exceed supply, and all conditions for raising prices arise.

Among the most important factors that generate demand inflation, we can name the following:

- excess of state budget expenditures over budget revenues, which is the reason for the state budget deficit ;

- inflationary expectations of consumers, which encourage them to reduce savings and increase current consumer spending;

- cheap (at a low interest rate on a loan) money that pushes households to increase consumption, and entrepreneurs - to additional investment.

Supply inflation arises on the assumption that the push to increase the general price level comes from the aggregate supply, when the output of goods is reduced, and the aggregate demand remains unchanged. That is, manufacturers have objective reasons for reducing production volumes. The number of goods decreases, and the number of consumers remains at the same level. Proceeding from this, the price of goods begins to grow.

The most significant factors of supply inflation are the following:

- significant rise in price or exhaustion of natural energy and mineral resources - oil, coal, gas, metal ores;

- the relative rise in price of the resource of labor as a result of such a rise in wages, which outstrips the growth of labor productivity.

As a rule, demand inflation and supply inflation intertwine, forming the so-called inflationary spiral. Its essence is as follows: demand inflation grows into supply inflation and vice versa. The impetus to the first can give rise to a deficit in the state budget, when expenditures exceed tax revenues. Thus, it turns into supply inflation, because against the background of a general rise in prices, production resources are also becoming more expensive, and the price of labor-wages is growing. This leads to a reduction in the production capacity of entrepreneurs and a reduction in the total volume of output of goods and the aggregate supply.

Inflation has the most negative consequences for the national economy, the most dangerous of which are as follows:

- depreciation of money and savings;

- Reducing the purchasing power of consumers and the level of their consumption;

- deepening of inequality and rapid social stratification of society;

- inhibition of technological progress;

- the loss of prices of the role of the market regulator.

For the correct choice of process control tools, it is important to find out which causes of inflation prevail - related to aggregate demand or to the aggregate supply. But, in any case, all anti-inflationary measures are rather contradictory, therefore they do not guarantee unconditional success. As experienced economists say, it is easier to prevent inflation than to limit it later.