Inflation is open and depressed: definition, examples

Inflation is a word that today has become firmly entrenched in the lexicon not only of economists, but of ordinary people. And for the latter it is connected with all their troubles and misfortunes. Open inflation is when yesterday engineer Ivan Vasilievich could afford to buy flowers for his wife on holidays, but today he is no more. He, as before, disappears at work and receives the same salary, but prices have risen. But another option is possible. It arises with the active intervention of the state in the economy in order to keep prices. In this case, hidden inflation appears. But the consequences are the same: people have to either tighten their belts, or work more in the hope of maintaining their previous standard of living. About this multifaceted phenomenon, so familiar to all residents of our country, about which the inflation in Russia literally screams by the years, and will be discussed in today's article.

Concept and its essence

It is believed that inflation is open, as, indeed, her and her hidden variety, appeared immediately with the advent of money. To prevent it, a gold standard was invented. The stability of the metal content of dollars, francs, pounds sterling, rubles and yen was designed to provide statesmen and ordinary workers with the possibility of long-term planning. However, world wars gradually destroyed this connection with gold. After the approval of the Jamaican monetary system in 1971, its metal content also lost the dollar. To date, all the world's currencies are not provided with gold. Therefore, governments can uncontrollably increase the amount of money in circulation, which is why inflationary price increases occur. So the measures, designed to solve the short-term financial problems of the state, are the cause of the catastrophe, which is extremely difficult to prevent.

The very term "inflation" first appeared in North America during the Civil War. Already in the 19th century it was actively used by scientists of Great Britain and France. However, this term was widely used only after the First World War. Inflation was said in connection with a sharp increase in the circulation of paper money. This phenomenon is typical not only for the present, but also for the Russian Empire in 1769-1895, the USA in 1775-1783. And 1861-1865, England - in the early 19th century, France - in 1789-1791, Germany - in 1923. If you look closely at each of these events, it becomes clear that the causes of open inflation are often hidden in huge Costs associated with wars and revolutions. But today this phenomenon looks much larger. It no longer has a periodic character, but is a chronic problem not of individual regions, but of the whole world. Therefore, its definition has become much broader. Inflation is a complex socio-economic phenomenon, which is associated with the overflow of channels of circulation of money in excess of the needs of commodity turnover. And it can not be reduced to a simple price increase. It is important that this adverse change in the market situation is associated with inflationary reasons.

Methods of measurement

The main problem in assessing inflation is that often prices are rising very unevenly. And there is a category of goods, the value of which does not change at all. Inflation suppressed is often not taken into account in statistical reports. But there are enough problems with the evaluation of the open variety of this phenomenon. There are several indices that are used to measure inflation. Among them:

• Consumer price index. This is the most commonly used indicator. It helps to estimate the cost of the basic "basket" of goods and services.
• Retail price index. The calculation of this indicator uses data on 25 important food products.
• The cost of living index. This indicator characterizes the real dynamics of expenditures of the population.
• The index of wholesale producer prices.
• Deflator of GNP.

The indicator, which is calculated on the basis of an unchanged set of products, is called the Laspeyres index. Its main problem is that it does not take into account the possibility of changing the commodity structure. The indicator, which is calculated on the basis of a changing set, is called the Paasche index. His problem is that he does not take into account the possible decline in the level of the well-being of the population. To eliminate the shortcomings of both indicators, Fisher's formula exists. This index is equal to the product of the previous two. Since open inflation is characterized by an increase in prices, there is a separate "rule of magnitude 70", which allows to estimate the number of years before their doubling.

Evolution of representations

Practically each of the economic schools has developed its own views on the problem of inflation. Often the differences lie in the causes of this negative phenomenon. Marxists believed that open inflation is characterized by a violation of the process of social production under capitalism, which manifests itself in the presence of currency in circulation in excess of economic consumption. In their opinion, the given problem is connected with internal contradictions of the given social system. Inflation open to monetarists is a too rapid growth in the money supply, beyond which the real expansion of production simply does not have time. However, all negative consequences are possible only in the short term. If we consider longer terms, then the money is absolutely neutral. In this way they reject the basic postulate of Keynesians that one can constantly maintain a certain rate of economic growth due to inflation. As a basis for this reasoning, the Phillips curve is taken. It reflects the directly proportional relationship between unemployment and inflation. Thus, it can be said that each of the economic schools has its own idea of the phenomenon under consideration. However, they are not antagonistic, but complement and continue each other.

Causes

Open inflation means that there is a discrepancy in the economy between the demand for money and the commodity mass. Such a disproportion can arise due to the deficit of the state budget, excessive investment, outstripping growth of wages in comparison with the level of production. Inflation open can be caused by both external and internal causes. The first include:

• Structural world crises, which are accompanied by rising prices for raw materials and oil.
• Negative balance of payment and foreign trade balance.
• An increase in the exchange of banks of the national currency for foreign currency.

Internal causes of inflation include:

• Hypertrophied development of military machine building and other heavy industries with a significant lag in the consumer sector.
• Disadvantages of the economic mechanism. This group of reasons include the budget deficit due to imbalances in income and expenditure, monopolization of the society, unreasonable increase of salaries due to the active activity of trade unions, "import" of inflation and unfavorable expectations of the population.

Tax and political reasons for inflation are also singled out. The former are associated with excessive fees from the state. The political reasons for inflation are due to the fact that the depreciation of money is beneficial to debtors, so they often lobbied for them. Often, inflation in each case is caused by a combination of various factors. So, in Western Europe after the Second World War, it was associated with a shortage of a large number of goods, and in the USSR - with a disproportional development of the economy.

Open Inflation

There are two main types of the phenomenon under consideration. Open inflation manifests itself in a market economy. It is an indispensable attribute of the economy of most countries. The mechanisms of open inflation include the expectations of the population and the relationship between costs and prices. The reasons for this phenomenon have already been considered above. There are such types of open inflation:

• Moderate (creeping). It is characterized by a relatively small increase in prices. Signs of open inflation in this case are almost invisible. There is no depreciation of money, so a moderate increase in prices of 10-12% per year is sometimes considered even beneficial to the economy.
• Galloping inflation. This form is accompanied by a rapid jump in prices - from 20 to 200% per year. It does not stimulate production, but leads to an increase in unemployment and a drop in the incomes of the population. Rosstat's data show that this type was typical for the Russian Federation in the 1990s. A similar situation developed in this period in other countries of Eastern Europe.
• Hyperinflation. It is accompanied by a rise in prices for astronomical quantities (in the year from 200 to 1000%, and sometimes more). If we consider all forms of open inflation, then this is the most dangerous. At the same time, there is a deformation of the sphere of production, the system of circulation of money and employment. The population seeks to quickly get rid of money by buying real values on them. In the society all existing social contradictions are aggravated, major political upheavals and conflicts become possible.

Inflation suppressed

Consider the second type of this negative phenomenon. We note at once that such a situation is often characteristic of an administrative-planned economy. Hidden inflation appears where the state is actively struggling with price increases. It is trying to freeze them at a certain level. Such measures cause a shortage of goods on the market. And this shows the obvious incorrectness of the state's actions. Instead of fighting internal causes that led to a negative situation, it tries to eliminate its external manifestations. Therefore, state measures to freeze prices are always unpromising in the long term.

Other types

If we ignore all the causes of inflation, then we can say that it can be disproportion in demand or supply. When equilibrium is established in the market, prices rise. Inflation of demand is caused by excessive money supply in the economy. This situation is connected with the fact that the incomes of the population and enterprises grow too quickly, and the rates of increase in production can not keep up with them. Inflation of supply is associated with an increase in costs for firms that produce products. Its reason is an increase in nominal wages due to the work of trade unions and rising prices for energy and raw materials due to crop failures or natural disasters.

In addition to the already listed species, there are also normal inflation. It is believed that it is a constant phenomenon, with which it makes no sense to fight. On the contrary, price growth of 3-5% per year is a guarantee of prosperity and stability of the economy.

From the point of view of correlation of changes in the conjuncture on various commodity markets, two types of inflation are distinguished:

• Balanced . In this case, prices for different product groups remain unchanged relative to each other. This type of inflation is not terrible for business, because entrepreneurs always have the opportunity to increase the market value of their products.
• Unbalanced . In this case, prices for different groups of goods are growing unevenly. It is dangerous for business. The cost of raw materials is growing faster than the price of the final product. Therefore, there is a risk of loss of profitability. It is often impossible to make a forecast for the future. So, sometimes two types of inflation separate separately depending on whether it is possible to predict the manifestation of this process in a certain period in the future.

Negative consequences

It is established that normal inflation of 3-5% positively affects the development of a market economy. However, getting out of control, it becomes the reason for a number of negative phenomena. Let's consider some of them:

• Inflation intensifies the social differentiation of the inhabitants of the state. It reduces opportunities for work and accumulation. People are trying to get rid of money (the most liquid form of assets), buying up real values. And the issue of securities does not always help somehow to stop this phenomenon.
• Inflation weakens the vertical and horizontal power. Uncontrolled issuance of banknotes for solving urgent problems leads to an increase in discontent of the population by state bodies and a decrease in their credibility.

Also, the negative consequences of inflationary processes include:

• Disorder of the money circulation system.
• Creation of tension in the financial sphere.
• Explicit and hidden price risk.
• Rapid distribution of natural exchange of goods.
• Low satisfaction of the demand of the population.
• Reduced investment due to the riskiness of these transactions.
• Change in the structure and geography of income.
• Decreased living standards.

Anti-inflationary policy

The negative consequences of inflation lead to the fact that governments of different countries are compelled to take measures at the level of state bodies to combat this phenomenon. Anti-inflationary policy includes a whole range of stabilization, monetary and budgetary measures. Each specific situation requires the use of a separate permit mechanism. In accordance with the concept of the OECD, in order to overcome inflation, it is necessary to focus on multivariate approaches. There are direct and indirect methods of combating this negative phenomenon. The first include:

• Distribution of loans by national authorities.
• Regulation of the level of prices by the state.
• Establishing salary limits.
• Regulation of foreign trade by national authorities.
• Establishment of the exchange rate at the state level.

Indirect methods of combating inflation include the following measures:

• Regulation of the issuance of banknotes.
• Establishing interest rates for commercial banks.
• Regulation of mandatory cash reserves.
• Operations in the open securities market, conducted by the Central Bank.

The choice of these or other measures is made under the influence of the general economic conjuncture. There are three main options: an income policy, an incentive to offer and regulation of monetary circulation.

Domestic realities

The Russian type of inflation differs significantly from foreign counterparts. This is due to the fact that it was formed in the transition from an administrative-command to a market economy with high rates of price changes. Rosstat's data indicate the following causes of inflation:

• Structural disproportions between the military-industrial complex and other branches. All processes in the economy did not meet the standards, so it took time for radical changes.
• High monopolization of the economy. Large companies themselves determine the level of prices, which does not correspond to the realities of the market economy.
• Militarization of the economy, a large army, a high level of development of the military-industrial complex. This created a huge gap between the demand for consumer goods, which are needed by the population, and the real supply of products.
• A huge scale of the state. This means that imports in Russia could not create a competitive environment.

If you look at how inflation developed in Russia over the years (given the history of the USSR), then the first peak in modern history fell on the First World War, the Civil War that followed and the first stage of the NEP. The amount of money in circulation in the period from 1914 to 1917 increased by 84 times. This was due to the huge expenditure on military needs. From 1917 to 1923 the money supply in circulation increased 200 thousand times. The second stage of inflation occurred already in the Soviet period - for the period of the pre-war five-year plans and the Second World War. The third stage occurred after the collapse of the USSR - in 1992-1996.

To date, inflation is a global problem that grips all countries. It is caused by disproportions in the development of social production. The danger of inflation concludes not only in that it leads to a decrease in the standard of living of the population, but also because it undermines the opportunities for regulating the economy. In modern realities, this phenomenon has ceased to be episodic, and has become a chronic disease of civilization. As for Russia, inflation is caused by underinvestment, that is, the wrong efforts of the Ministry of Finance and the Central Bank. To combat it in the domestic realities, it is necessary to support its producer and introduce more stringent control over prices. Summarizing, we can say that in normal inflation there is nothing wrong, but the emergence of this phenomenon out of control can lead to huge negative consequences.