What are the causes?
Inflation is a monetary phenomenon caused by the issuance of too much money for circulation in comparison to the supply of goods. This increase in money happens for a variety of reasons. The first of these is an increase in population income that is not accompanied by an increase in goods production. Excessive demand raises prices and raises the inflation rate. Crop failures, import restrictions, or monopolistic behavior can all contribute to an imbalance in supply and demand for goods and services. Furthermore, rising production costs and rising enterprise expenses for wages, taxes, interest payments, and other items all contribute significantly to rising inflation rates. Furthermore, the rise in import prices reflects both an increase in global prices and a weakening of the national currency. A weakening national currency can have a direct impact on the prices of finished goods imported from other countries. The overall effect of exchange rate changes on price dynamics is known as the """"transfer effect,"""" and it is frequently regarded as a separate inflation factor. The so-called waiting moments play an important role in the development of the inflationary process. The population is compelled to purchase goods as prices are expected to rise. As a result, some of them run a deficit, and prices rise as a result. Such inflationary expectations are difficult to reduce.
Inflation can manifest itself in a variety of ways. When prices are fixed in a regulated economy (such as the USSR) or during wartime, it can have a hidden character - this is known as suppressed inflation. It is followed by a large product deficit, an increase in shadow trade, a sharp increase in market prices, and so on. However, the rejection of such regulation (following the war or in countries transitioning from an administratively regulated to a market economy) frequently results in """"galloping inflation"""" with a frenzied price increase. It results from a mismatch between the supply of money and the supply of goods.
Other types of inflation include:
- Administrative inflation refers to the inflation caused by """"administratively"""" operated prices.
- Galloping inflation - price increases that are spasmodic in nature.
- Hyperinflation - Inflation with a very high rate of price growth;
- Built-in inflation - defined as the average level over a given time period;
- Imported inflation - inflation caused by external factors such as excessive inflows of foreign currency into the country and increases in import prices.
-Induced inflation - inflation caused by the influence of economic or external factors;
Credit inflation refers to inflation caused by excessive credit expansion.
- Unexpected inflation - the rate of inflation that is higher than expected for a given period.
- Expected inflation - the estimated rate of inflation in the future period due to the action of current period factors;
- Open inflation - price increases in consumer goods and production resources cause inflation.
High Inflation's Negative Effects
A high inflation rate reduces the purchasing power of all economic entities, which has a negative impact on demand, economic growth, population living standards, and societal moods. Income depreciation reduces opportunities and undermines savings incentives, interfering with the formation of a stable financial foundation for investment. Furthermore, high inflation is accompanied by increased uncertainty, which complicates economic entities' decision-making. Overall inflation has a negative impact on savings, consumption, production, investments, and the general conditions for the economy's long-term development.
How can I reduce?
Fighting inflation is extremely difficult, as developed countries' experience shows. It appears simple: freeze prices or implement some form of price regulation. Unfortunately, this method is only effective for a limited time. The freezing of prices will soon be triggered by an increase in the goods deficit, exacerbating inflation. Contractionary monetary policy is another method of combating inflation. The goal of this policy is to reduce an economy's money supply by raising interest rates. This helps to reduce spending because those who have money prefer to keep and save it rather than spend it. It also means less credit available, which means less spending."""