Almost every person has heard about such a term as inflation. Inflation is a rise in prices for goods, products, for everything that you can buy. And, of course, the word inflation for many people sounds in a negative context. This is not surprising. After all, the rise in prices reduces the purchasing power of the national currency and "eats" people's wages. Although for the middle and rich classes of society, the rise in prices is a positive factor because it makes them richer.
It is customary to divide the inflation rate into two indicators: the consumer price index and the industrial price index. The middle and rich classes have large property and, accordingly, with rising prices, the value of their property, and, consequently, wealth - is growing. Although the government is used to saying that it is fighting inflation, but it is positive for the government’s executives. This is because price increases create, for the above mentioned classes, the illusion of wealth, and then these classes support the main people in the government.
Types of inflation
But let's consider what causes the rise in prices, what are the factors of inflation. In most cases, inflation is divided into two groups: demand inflation and supply inflation. Inflation of demand arises as a result of increased demand from consumers. Goods are usually not enough and the balance of equilibrium supply and demand is restored due to rising prices. The main factor in demand inflation is the growth of incomes of citizens. As for the inflation of the proposal, it arises as a result of an increase in the cost of production.
In other words, manufacturers spend more money on the production of one unit of goods, and since they do not want to reduce their profits, the price increases by the magnitude of cost increases. The increase in the cost of production arises due to rising prices for raw materials, electricity, heating, rental of premises, as a result of wage increases and an increase in rates for certain types of taxes.
The concept of monetary factors of inflation
Inflation can generate monetary and non-monetary factors. Consider the monetary factors of inflation. They are the issue of money, the budget deficit and growth in lending.If we analyze the monetary factors of inflation, they are the result of monetary (another name for monetary) policy. That is, these factors are the result of central bank and government action.
Issuing money means an additional release of monetary units into the economy. When conducting monetary policy, there is one rule. It consists in observing a peculiar balance determined by the Fisher equation. On the one hand the equation is the volume of the product produced in the national unit, and on the other hand, the multiplication of the amount of money in the economy and the speed of movement of the money. In simple words, it sounds like this: how much a country has produced products in monetary terms over a certain period of time, so much should be money in the economy. Now imagine a situation where the amount of money exceeds the amount of goods in the economy. The result is a depreciation of money and rising prices. Why should the state do that? Usually, the issue of money occurs at a slow pace and has little effect on prices. But when the government has problems, that is, there is not enough money in the budget, then the monetary machine is turned on.
The concept of a budget deficit means a significant excess of expenditures from the budget over revenues to the budget.Deficit, as a rule, occurs as a result of an increase in expenditures from the budget. What is going on? The state throws more money into the market, and, accordingly, it reacts with rising prices. The state throws money in such ways: the growth of public procurement, and the growth of wages, pensions, social benefits to citizens. The dominance of social policy increases the incomes of citizens, and, consequently, the growing demand for products. And when demand exceeds supply, then equalization occurs due to rising prices.
The last factor in the group of monetary factors affecting inflation is credit growth. In order to accelerate the development of the economy, the state increases the volume of business lending through the banking system as usual, and thus, again introduces excess money into the economy.
The concept of non-monetary factors of inflation
If we consider the non-monetary factors of inflation, this includes monopolistic pricing, disproportion in social production, wage growth of private sector workers, rising raw material costs, rising tax rates included in the price of goods and foreign economic factors.
As for monopoly pricing, here almost everything is clear. A certain sector of the economy is monopolized, that is, it is in the hands of several persons or very rarely in the hands of one person. As always, these people have little money and they raise prices. There is no competition in them, so this price increase does not lead to losses in income. At the present stages of development of monopolies, which are concentrated in private hands, in most countries there is no. Monopolized industries are usually state-owned.
As for the rise in prices, depending on the growth of wages, it is worth noting that when wages grow at higher rates than labor productivity, then the private sector has no choice but to raise prices. What other factors that cause inflation - besides the factors described above that cause inflation, let us consider the growth of tax rates on raw materials and outside economic factors. The price always includes taxes such as VAT and excise taxes. The growth of their rates leads to an increase in the prices themselves. And to external economic factors include the devaluation of currency and the rise in world prices.
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