Inflation is a situation where the channels of money circulation are overflowing with excess money supply. This is manifested in an increase in commodity prices.
As an economic phenomenon, inflation actually appeared in the 20th century, although periods of skyrocketing prices, for example, during wars, were also noted earlier. The term “inflation” appeared in connection with the massive transition of national monetary systems to the circulation of paper money. Initially, the concept of "inflation" included the phenomenon of excess paper money and their further depreciation, which led to an increase in commodity prices.
The concept
In the modern world, inflation is a consequence of a whole range of factors. This is a confirmation that it is not a purely monetary phenomenon. It also represents a socio-political and economic phenomenon. Inflation is influenced by public sentiment and social psychology. Therefore, the term “inflationary expectations” is true: in the event that society expects quick inflation, it will surely arise.
Inflation gradually became part of a market economy, which was facilitated by many global factors, including the universality of social transfers and price systems, the rapid growth and complication of the production structure, a change in the pricing process due to the influence of monopolistic enterprises, and a decrease in price competition. An increase in production efficiency, as a rule, is manifested not in a fall in prices, but in an increase in the mass of incomes and profits of production participants.
The dynamics of price increases - a prerequisite or inflation itself. The increase in government spending and the budget deficit is also one of its causes.
Inflation rate
The decisive characteristic is the magnitude of inflation. The inflation rate is calculated based on the consumer price index, which is published by statistical agencies. To determine the indicator for a certain period of time, you should multiply the monthly indices and calculate the cumulative total. As historical practice shows, the higher the rate of inflation, the worse it is for society. Normal inflation is characterized by an increase in prices of 5% per year. Galloping - up to 100% per year, and hyperinflation - thousands of percent per year.
Moderate, or creeping inflation, implies a relatively low price increase. Such inflation is not considered something extraordinary. Some economists even believe that it is useful and contributes to the development of the economy. It makes it possible to carry out effective price adjustments in the conditions of fluctuating demand and changing characteristics of production. Moderate inflation allows money to maintain a stable value.
Galloping inflation creates more stress in the economy, but price increases can be predicted. Money very quickly becomes investment or consumer goods. The initial stage is characterized by an increase in the money supply, outstripping the rise in prices. At the main stage, the situation changes dramatically: a sharp rise in prices can cause even a slight increase in the money supply, barter transactions are flourishing, and natural exchange is expanding.
With hyperinflation, prices rise by more than 300% per year. Also, super-hyperinflation is singled out separately, when prices increase monthly by 50%, however this inflation rate is not extreme. Hyperinflation causes money to lose its value, the function of a store of value and a measure of value. The growth rate of prices is much greater than the amount of money that is in circulation.
Thus, moderate inflation is acceptable and does not require the use of additional anti-inflationary measures to maintain stability in society.