Is it necessary to fight inflation? What is inflation in plain language

Economists understand the term "inflation" as a steady increase in the general level of prices for goods and services. This leads to a decrease in the purchasing power of consumers. But the question of whether it is necessary to fight inflation, you can not give a hasty, obvious answer. This is due to the fact that a certain percentage of the price increase is even useful for the economy, since it allows you to "disperse" it. We'll talk about this and many other things in this article.

Briefly

If we talk about inflation in a simple language, then we need to turn to all the things we understand - money. What happens to them when the general price level is raised? Suppose we have a salary of 100 dollars. With inflation every month, we can buy an ever smaller set of products. Or let's look at another example. Let the pack of chewing gum in 2016 cost one American dollar. If the annual inflation rate is 2%, then in 2017, it will have to pay 1,02 dollars for it. USA. Thus, this phenomenon leads to a depreciation of the country's monetary unit.

Types

On the question of what inflation is, they answer as follows: this is a steady increase in the general price level. However, one must understand that statistics on this indicator is generalized and does not take into account all goods and services. Is it necessary to fight inflation? Before answering this question, it is necessary to understand what caused it. The following types of inflation are distinguished:

• Deflation. This phenomenon in the economy, which is expressed in the general fall in prices.
• Hyperinflation. This is an extremely rapid price increase. It can even lead to the collapse of the national financial system. One of the known examples of hyperinflation is connected with Germany in 1923. Then prices grew by 2500% per month.
• Stagflation. It is a combination of high unemployment, stagnation in production and inflation. Stagflation was characteristic of industrialized countries in the 1970s, when oil prices rose.

What is the reason for the increase in the general price level?

The causes and consequences of inflation have been the subject of debate among various economic schools for many years. However, they still did not reach a consensus. However, all theories can be divided into two currents:

• Demand inflation. It is related to the fact that there is little goods, and there is a lot of money in circulation. Is it necessary to fight inflation of this type? How to do it? The main way here is to raise interest rates. This will lead to a decrease in money in circulation. Demand inflation is usually characteristic of developing economies.
• Inflation of supply. It is connected with the fact that the costs of producers are increasing. In this regard, they are forced to raise prices in order to maintain the rate of profitability of their business. Costs include not only spending on production resources. Inflation proposals may be associated with an increase in taxes or salaries.

Effects

If you ask a layman about the topic, then almost everyone will answer that inflation is definitely a negative phenomenon that devastates wallets and worsens the standard of living. However, in reality it affects different strata of the population differently. An important factor is whether they expect it or not. Is it necessary to fight inflation, if everyone has already prepared for it? Expectations compensate for the increase in prices. This is due to the fact that banks manage to change interest rates, and people find a better-paid job or discuss with the authorities a salary increase. Serious problems arise when inflation is unexpected:

• Lenders lose money, and borrowers win. If inflation is high enough, then it can fully compensate for the interest that is payable by the latter.
• Insecurity in the future makes the company save and do not invest in development. This brings considerable damage to business and the entire national economy in the long term.
• People who have a fixed income, such as retirees, experience a deterioration in the standard of living associated with the depreciation of money.
• If the inflation in the country is greater than in others, the products manufactured in it become less competitive on the world market.

People often complain about rising prices, but in reality it may not be a problem. If salaries increase at the same rate or faster, then everything is fine. There is no need to think about how to deal with inflation, if its level is 2-3%. This is an indication that the economy is growing. If there was no inflation at all, then this would be an indicator of the deterioration of the situation.

Statistical evaluation

Now, when we talked about what inflation is, in simple language, let's move on to how it is measured. Statistical evaluation of this phenomenon remains a complex problem. Disputes often revolve around what goods and services to consider in a representative set. After determining the "basket", inflation is measured based on its value in the current year compared to the past. In the US, the following two indicators are used:

• Consumer price index. He estimates inflation from the point of view of the buyer. The representative set includes food, clothing, gasoline, cars.
• The index of production prices. He estimates inflation in terms of business. This index takes into account the change in market prices for goods and services produced in the country.

Rosstat: inflation

In November 2016, prices in the RF increased by 5.8% compared to the previous year. This is less than expected. This indicator is estimated by Rosstat. Inflation in various groups is as follows:

• Food. The rate of inflation is 5%.
• Transport - 5,4%.
• Clothing and footwear - 7.6%.
• Rest and culture - 6%.
• Furniture and household appliances - 5,6%.
• Alcoholic beverages and tobacco products - 8.7%.

Compared to October in November, prices increased by 0.4%. The average inflation rate in Russia for the period from 1991 to 2016 is 133.5%. The highest rate was recorded in December 1992. Then it was 2333.3%. The lowest is in April 2012. During this period, the inflation rate in the Russian Federation was only 3.6%.

Control and regulation

There are many ways in which the state is struggling with inflation. Conditionally they can be divided into several groups:

• Methods of monetary and fiscal policy.
• Establishment of a fixed exchange rate.
• Gold standard.
• Direct regulation of wages and prices.
• Stimulation of economic growth.
• Providing subsidies and assistance to low-income groups of the population.

Learn more about the different ways

One way to combat inflation is to link the exchange rate of the national currency to another, which is more stable. However, this leads to the fact that the price level in one country begins to depend on the conjuncture in another state. In addition, in this case, the central bank and the government can not use monetary policy to regulate inflation.

This method was widely used during the Bretton Woods system. Then the currencies of most countries were pegged to the dollar. After the 1970s, states moved to a floating exchange rate. A similar situation with the control of inflation occurs when the national currency is tied to gold.

Another method of combating price increases is to regulate wages and prices. It was widely used in wartime. Direct control is characteristic of planned economies. In market conditions, the regulation of prices for important product groups can only be a temporary phenomenon. Any state strives to increase the rate of economic growth. To do this, it invests in the development of production, infrastructure, health care and education. If the rate of economic growth corresponds to an increase in the money supply in circulation, then inflation does not arise. In conditions when the state no longer has any other way out, it starts subsidizing low-income citizens.

Monetary and Fiscal Policy

Mechanisms from this category are used by governments and central banks most often. To overcome inflation, interest rates increase, the supply of money decreases. Central banks are trying to maintain an increase in the general price level within 2-3%. It is believed that deflation has a detrimental effect on the economy. Higher interest rates reduce the volume of money in circulation. This leads to a drop in prices. This is a method of monetarists. Keynesians believe in reducing aggregate demand through fiscal policy, that is, increasing taxation and reducing public investment.