Inflation is an increase in the general price level of all things and services. It, like unemployment, is generated by the violation of certain economic proportions at the national level. Therefore, its consequences apply to all citizens of the country, without exception. This phenomenon can have different reasons, depending on which there are two main types of it: supply inflation and demand inflation. Let's look at what these species are and how they interact with each other.
Demand of inflation occurs when factors on the side of aggregate demand give an impetus to the growth of the general price level. At the same time, the aggregate supply remains unchanged. In this situation, production is not able to respond to excess cash by increasing production volumes. Thus, demand begins to significantly exceed supply, and all conditions for price increases arise.
Among the most important factors that generate demand inflation are the following:
- excess of state budget expenditures over budget revenues, which causes 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 the loan) money that encourages households to increase consumption, and entrepreneurs to additional investments.
Supply inflation arises provided that the impetus for the growth of 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 quantity of goods decreases, while the number of consumers remains at the same level. Based on this, the price of goods begins to rise.
The most significant factors in supply inflation are the following:
- a significant rise in price or exhaustion of natural energy and mineral resources - oil, coal, gas, metal ores;
- the relative rise in the cost of labor due to such an increase in wages, which is ahead of the growth of labor productivity.
As a rule, demand inflation and supply inflation are intertwined, 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 may give rise to the state budget deficit when expenses exceed tax revenues. Thus, it turns into inflation of supply, because against the background of a general increase in prices, production resources are becoming more expensive , the price of labor is growing - wages. This leads to a decrease in the production capabilities of entrepreneurs and a reduction in the total volume of output of goods and 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;
- a decrease in the purchasing power of consumers and their consumption;
- deepening inequality and rapid social stratification of society;
- braking of technical progress;
- The loss in prices of the role of the market regulator.
For the right choice of tools for regulating the process, it is important to find out what causes inflation to prevail - associated with aggregate demand or aggregate supply. But, in any case, all anti-inflationary measures are quite contradictory, therefore they do not guarantee unconditional success. Experienced economists say inflation is easier to prevent than to limit it later.