Inflation- increase in the general (average) price level in the economy.

Webmaster's note: if you are not an expert in the field of economics, read the chapter from my book in the presentation for schoolchildren "Inflation". In this presentation, the material was tested on my friends - lawyers and engineers. Moreover, due to the fact that The topic of inflation is not dealt with in an academic manner; many of them shared the story with their friends.

See also the article in Ukrainian " Inflation ".

When talking about inflation, this does not mean that all prices necessarily increase. Even during periods of high inflation, some prices may remain stable while others may fall. We are talking about a growth trend of a certain average price level.

Eat another definition Inflation is the process of decreasing the value of money, as a result of which the same amount of money can buy a smaller volume of goods and services after some time. In practice, this translates into increased prices.

It follows from this that the opposite is also true:

Inflation- overflow of circulation channels money supply in excess of the needs of trade turnover, which causes depreciation monetary unit and rising prices.

From this point of view, a distinction is made between balanced inflation (the prices of various goods do not change relative to each other) and unbalanced inflation (the prices of various goods constantly change relative to each other).

Depending on the rate, creeping inflation varies (prices rise less than 10% per year, purchasing power money is practically preserved, contracts are signed in nominal prices), galloping inflation (price increases occur abruptly and rapidly - 20-200% per year, money quickly materializes into goods, contracts are tied to price increases) and hyperinflation. There is also the phenomenon of stagflation - an inflationary decline in production.

Significant inflation (ten percent or more per year) indicates economic problems in the state.

In terms of sources, economists explain inflation from two perspectives: as demand-pull inflation, when there is excess cash expenses encounters a limited supply of goods produced under conditions of full employment, and as supply inflation, in which price increases are associated with an increase in production costs under part-time employment. J.M. Keynes and his followers explained it by excessive demand at full employment, i.e., on the demand side. Others - neoclassicists - looked for the reason in the growth of production costs or production costs, i.e. on the supply side. The truth should be sought in the synthesis of two opposites, that is, to explain inflation from both the demand side and the supply side. Disproportions between supply and demand, the excess of income over consumer expenses can be generated by a state budget deficit (state expenses exceed income); overinvestment (the volume of investment exceeds the capabilities of the economy); rapid growth wages compared to production growth and increased labor productivity; arbitrary establishment of state prices that cause distortions in the size and structure of demand; other factors.

Depending on the growth rate, there are:

• Creeping (moderate) inflation (price increases of less than 10% per year). Modern economists consider it as an element of normal economic development, since, in their opinion, slight inflation (accompanied by a corresponding increase in the money supply) can stimulate the development of production and the modernization of its structure. The growth of the money supply accelerates payment turnover, reduces the cost of loans, and promotes the activation of investment activities and production growth. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply with more high level prices (for a description of this mechanism, see Inflation for Schoolchildren)

• Galloping inflation (annual price increases from 10 to 50%). It is dangerous for the economy and requires urgent anti-inflationary measures. Predominant in developing countries;

• Hyperinflation (prices rise at an astronomical rate, reaching several thousand percent per year, or over 100% per month). Paralyzes economic mechanism, with it there is a transition to barter exchange. It is also characteristic of countries in certain periods when they experience a radical change in their economic structure.

Stagflation is a situation where inflation is accompanied by a drop in production (stagnation).

The concept of demand-pull inflation suggests that if an economy strives for high levels of output and employment, then moderate inflation is necessary. Proponents of the concept of cost-driven inflation argue that inflation can be accompanied by a reduction in real national output and employment. In practice, however, it is difficult to distinguish between these two types of inflation.

There are examples when the economy was revived by stimulating inflation processes. In Germany in 1933, a government program of road construction and public works helped revitalize industry and the economy. Exit from Great Depression in the USA was also accompanied by an increase government spending. (See Great Depression)

The mechanism of inflation.

1. Total volume goods that can be purchased with the available stock economic system the money supply may grow more slowly than the volume of the money supply, or even decrease - in this case, the cost of goods increases, and the value of money decreases.
2. The ratio of the volume of goods and the volume of money is not directly related, but takes into account the speed of turnover of the money supply in a given system. With an increase in the speed of money turnover, this will be equivalent to an increase in the money supply without changing the commodity supply.

On inflation rate a significant influence is exerted by the volume of money supply withdrawn from direct consumption through the implementation of long term investment that do not provide for quick returns, the level of deposits held in banks, the refinancing rate, and so on.

The following reasons may also influence the occurrence of inflation:

1. Monopoly of large corporations on determining prices and their own production costs, especially in the primary industries;
2. The situation when as a result economic growth a labor shortage arises, which forces wages to rise;
3. The reduction in the real volume of national production, which, when stable level the money supply leads to an increase in inflation rates, since a smaller volume of goods and services corresponds to the same amount of money;
4. An increase in government spending, to finance which the government resorts to money issue, increasing the money supply beyond needs commodity circulation. It is most pronounced during war periods.
5. High wages caused by trade union monopoly or legislative changes stimulating wage increases

Methods for measuring inflation

The most common method of measuring inflation is the index consumer prices(Consumer Price Index, CPI), which is calculated in relation to the base period. As an example, you can familiarize yourself with the consumer price inflation index in Ukraine for 1991-2008. (they are given in a separate article and correspond to official statistics)

But for different purposes, different indices for assessing the level of inflation are used, namely:

• Consumer Price Index (CPI)
• Producer Price Index (PPI) - reflects the cost of production without taking into account the additional price of distribution and sales taxes. The PPI value is ahead of the CPI data in time.
• Cost-of-living Index (COLI) - takes into account the balance between increased income and increased expenses.
• Asset price index: shares, real estate, debt capital prices, etc. Typically, asset prices grow faster than the prices of consumer goods and the cost of money. Therefore, asset owners only get richer due to inflation.
• GDP deflator(GDP Deflator) - calculated as the change in price for groups of identical goods.
• Purchasing power parity national currency and changes in exchange rates.
• Paasche index - shows the ratio of current consumer spending to the costs of purchasing the same assortment at prices of the base period.

Impact of inflation

If the price level rises faster than the nominal income in a society (that is, income expressed in money), then real income will decrease (real income is determined by the number of goods and services that can be bought with the received nominal income). It follows that people who receive relatively fixed nominal incomes (for example, pensioners) suffer most from inflation. People living on fluctuating incomes can benefit from inflation if their income rises nominal income outpaces price growth in the economy.

Consequently, as a result of inflation, real income is redistributed in society. Savers suffer from inflation because as prices rise, the real value, or purchasing power, of savings set aside for a rainy day decreases. Inflation also redistributes income between debtors and creditors: it benefits loan recipients, as they borrow money with greater purchasing power and return money depreciated by inflation to the lender. Hence the significant increase in nominal interest rates in conditions of strong inflation and falling real interest rates. Finally, inflation leads to disorientation of economic agents due to instability of market information.

During particularly strong inflations, such as in Russia during Civil War, or Germany in the 1920s. monetary circulation may generally give way to natural exchange.

In the history of the world economy, there have been two cases of abrupt growth in prices associated with a fall in the cost of precious metals. After the discovery of America, a lot of gold and especially silver began to flow into European countries from Mexico and Peru. In the 50 years since the beginning of the 16th century, silver production increased more than 60 times. This caused an increase in commodity prices by the end of the century by 2.5-4 times. After the development of Californian (and then Australian) gold mines began in the late 40s of the 19th century. At the same time, gold production increased more than 6 times, and prices increased by 25-50%. This type of inflation has been observed throughout the world.

Inflation is an increase in prices for goods and services. Inflation causes depreciation money, the purchasing power of the population is decreasing. The reverse process of inflation, that is, a decrease in prices, is called deflation.

Types of inflation

In the economic literature, two types of inflation are distinguished: supply and demand.

Demand inflation occurs when the monetary income of individuals and firms grows faster than the real volume of goods and services. A similar situation in the market can be caused, firstly, by the state - through unpredictable military and social orders, and secondly, by entrepreneurs who artificially increase the demand for goods.

In such conditions, the economy will be close to full employment and capacity utilization. The growth of incomes of the population, firms and the state will contribute to an increase in aggregate demand, and consequently, rising prices.

Supply inflation is a rise in prices caused by an increase in production costs in conditions of a shortage of production resources, and, consequently, a reduction in total supply. The main reasons for the increase in costs are the increase in nominal wages and prices for raw materials and electricity.

Types of inflation

Uneven price increases across product groups creates inequality in profit rates, stimulates the outflow of resources from one sector of the economy to another (in Russia from industry and agriculture in trade and financial and banking sector).

Types of inflation:

Demand-pull inflation is generated by an excess of aggregate demand compared to the real volume of production (shortage of goods).

Supply (cost) inflation - price increases are caused by an increase in production costs in conditions of underutilized production resources. Increasing unit costs reduces the volume of products offered by manufacturers at the existing price level.

Balanced inflation - prices of various goods remain constant relative to each other.

Unbalanced inflation - the prices of various goods change in relation to each other in different proportions.

Projected inflation is the inflation that is factored into expectations and behavior economic entities.

Unpredicted inflation comes as a surprise to the population, since the actual growth rate of the price level exceeds the expected one.

Adapted consumer expectations - changing consumer psychology. Often arises from the dissemination of information about future potential inflation. Increased demand for goods allows entrepreneurs to raise prices for these goods.

Suppression of inflation is characterized by external price stability with active government intervention. An administrative ban on raising prices usually leads to increasing shortages of those goods for which prices would have increased without government intervention, not only due to the initial increased demand, but also as a result of decreased supply. Government subsidization of price differences for producers or consumers does not reduce supply, but additionally stimulates demand.

Depending on the growth rate, there are:

creeping(moderate) inflation(price growth less than 10% per year). Western economists consider it as an element of normal economic development, since, in their opinion, slight inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates payment turnover, reduces the cost of loans, contributes to the activation of investment activity and the growth of production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. Intermediate level inflation by country EU in recent years amounted to 3-3.5%. At the same time, there is always a danger that creeping inflation will escape state control. It is especially great in countries where there are no established regulatory mechanisms economic activity, and the level of production is low and is characterized by the presence of structural imbalances;

Galloping inflation (annual price increase from 10 to 50%). It is dangerous for the economy and requires urgent anti-inflationary measures. Predominant in developing countries;

Hyperinflation

(prices are growing at an astronomical rate, reaching several thousand and even tens of thousands of percent per year). Occurs due to the fact that for coverage budget deficit The government issues an excess amount of banknotes. Paralyzes the economic mechanism, with it there is a transition to barter exchange. Usually occurs during periods of war or crisis.

The expression is also used chronic inflation for long-term inflation. Stagflation they call a situation when inflation is accompanied by a drop in production (stagnation).

Causes of inflation

IN economic science The following causes of inflation are distinguished:

The growth of government spending, for the financing of which the state resorts to monetary emissions, increasing the money supply beyond the needs of commodity circulation. This is most pronounced during war and crisis periods.

Above-plan expansion of the money supply due to mass lending (see. Bank multiplier);

Monopoly large firms to determine prices and own production costs, especially in primary industries;

Monopoly trade unions, which limits the ability of the market mechanism to determine an acceptable level for the economy wages;

A reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in prices, since the same amount of money corresponds to a smaller volume of goods and services.

During particularly strong inflations, such as in Russia during Civil War, or Germany 1920s monetary circulation may generally give way natural exchange.

For modern economies, in which the role of money is played by obligations, who do not have their own cost (fiat money), slight inflation is considered normal and is usually at the level of several percent per year. Inflation rates typically rise slightly at the end of the year, when both household consumption and corporate spending rise.

Consequences of inflation:

1) a decrease in real income (especially for people with a fixed income);

2) depreciation of deposits;

3) inflation harms creditors;

4) inflation causes nervousness in people, social tension in society (for example, inflation in Germany in the 20s was a factor in Hitler’s rise to power);

5) inflation makes planning difficult even in short term, which negatively affects production volumes;

6) inflation disrupts the inflationary process, and hyperinflation destroys it, since it depreciates savings, it is impossible to purchase new equipment or expand production.

Social and economic consequences of inflation:

1 Redistribution costs of inflation.

Inflation makes debtors rich and creditors lose. Income is redistributed in favor :

a) monopoly enterprises;

b) financial structures;

c) shadow economy;

d) individuals, when, for example, managers set their own salaries.

Losing income:

a) people with fixed incomes;

b) creditors;

c) people who have deposits in banks.

2 Inflation tax – occurs when the government finances a deficit state budget by increasing the money supply:

IT = R *C+D(P-i),

where P is the inflation rate;

C – cash;

D – deposits (deposits in banks);

i- interest rate by deposits.

3 Declining real income.

It can be represented as the difference between nominal incomes and price increases:

”RD = DN – ”R.

Another indicator that is used to measure changes in real income is the real income index:

IРД = IDN / Iprice,

where IRD is the index of real income;

IDN – nominal income index;

Іtsen – price index.

4 Uncertainty created by inflation in relation to future prices, since the future value of money is unpredictable.

5 Inflation creates social conflicts; leads to bankruptcy of banks, enterprises, and strikes. Guidelines in economic activity are lost; accumulation is difficult; money ceases to perform its functions.

6 Inflation expectations – These are the prevailing ideas in society about what the upcoming inflation rate will be.

Those who manage to increase their income at a faster pace benefit from inflation:

1 Commercial banks, currency sellers, trading enterprises. The increase in prices and incomes of these structures is greater than the increase in costs.

2 Borrowers – can return money to the lender with less purchasing power.

3 A government that borrows money.

Anti-inflationary policy is a set of government regulation measures aimed at controlling inflation.

There are two known ways to eliminate inflation: a) radical; b) adaptive (adjustment to inflation).

Anti-inflationary government policies can be shaped by either Keynesian or neoclassical theoretical perspectives.

Keynesian approach: active fiscal policy- changes in government spending and taxes in order to influence effective demand. When there is excess demand, the government limits its spending and increases taxes. As a result, demand is reduced and inflation rates are reduced. But at the same time, production growth is limited, which causes an increase in unemployment. Rising unemployment causes a reduction in demand and now it is necessary to stimulate the purchasing power of entrepreneurs and consumers. If demand is insufficient, fiscal policy acts in the opposite direction: government investment in production increases and taxes decrease. All these measures increase demand, but at the same time cause an increase in inflation. With this approach, the government is forced to constantly balance between inflation and unemployment.

Neoclassical approach prescribes monetary regulation, which indirectly and flexibly affects the economic situation. The country's central bank implements deflationary measures by limiting the amount of money in circulation.

Currency reform- changes carried out by the state in the field of monetary circulation, usually aimed at strengthening the monetary system.

Highlight the following types monetary reform:

Transition from one monetary equivalent to another- for example, the transition from copper to silver money in Ancient Rome or the transition from bimetallism to monometallism in most European countries at the end of the 19th and beginning of the 20th centuries.

Replacement of banknotes(banknotes and coins) that have become defective (and/or devalued coins) full-fledged coins or irredeemable change (for example, in Great Britain in 1695 all old coins that had lost their original weight were withdrawn for re-minting them into new, full-fledged ones; Russia as a result reforms of 1839-1843 switched from paper banknotes to banknotes redeemable for silver);

Currency stabilization or partial measures to streamline monetary circulation through devaluation, denomination, revaluation, etc.;

Education of a new monetary system - carried out during the period of collapse, acquisition of independence by former colonies, formation of states, etc.

Types of inflation

inflation monetary reform shock

Depending on the rate (speed of occurrence), the following types of inflation are distinguished:

1) moderate (creeping) inflation;

2) galloping (jump-like) inflation;

3) hyperinflation.

Depending on the causes of inflation, there are:

1) demand inflation;

2) cost inflation;

3) structural and institutional inflation.

Depending on the nature of the manifestation, the following types of inflation are distinguished:

1) open inflation? positive growth in the price level in conditions of free, unregulated prices;

2) suppressed (closed) inflation? increasing commodity shortages under conditions of strict government control over prices. It is expressed in an increase in cash flow.

Other types of inflation:

1) balanced inflation? the prices of different goods change to the same extent and at the same time. Does not have any negative consequences;

2) unbalanced inflation? prices for goods grow unevenly, which can lead to a violation of price proportions. Unbalanced inflation brings big problems economy and business entities. With it, there is no possibility of forecasting product sales; it is impossible to say which product will become the leader and will be in demand. There is no way to calculate the most profitable areas where you should invest. Industry stops developing in such conditions. In our country and in the CIS countries there is unbalanced inflation. The rise in prices for raw materials occurs faster than the rise in prices for the final product; the cost of one element is more than the device itself;

3) expected inflation? allows you to take protective measures. Usually calculated government agencies statistics. Does not have any negative consequences for the economy;

4) unexpected inflation. Its appearance cannot be calculated and predicted; it appears spontaneously and cannot be controlled;

5) imported inflation? develops under the influence of external factors.

Moderate inflation

Moderate (creeping) inflation (price increases of less than 10% per year). Western economists consider it as an element of normal economic development, since, in their opinion, slight inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates payment turnover, reduces the cost of loans, contributes to the intensification of investment activity and the growth of production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. The average inflation rate in EU countries in recent years has been 3–3.5%. At the same time, there is always a danger that creeping inflation will escape state control. It is especially great in countries where there are no proven mechanisms for regulating economic activity, and the level of production is low and is characterized by the presence of structural imbalances.

The inflation process can develop in two main directions. If macroeconomic disequilibrium towards demand is expressed in a constant increase in prices, inflation should be considered open. When it is accompanied by general government price controls, inflation becomes suppressed.

Since inflation is a macroeconomic phenomenon, it is characterized by an increase in national economic price indices. At the same time, in the economy any developed country very often situations arise when, on individual commodity markets There is a decline in prices (or at least a slowdown in their growth). Why does this happen? There is only one explanation - moderate open inflation does not destroy market mechanisms. They continue to work, push investment, stimulate expansion of production and supply. And if so, then the fight against inflation becomes a task, albeit difficult, but still not hopeless.

Among the mechanisms of this form of inflation, first of all, one can highlight the one that is associated with the deformation of the psychology of consumers and producers. Inflation causes deep, radical changes in the psychology of the acquirer. Faced with a constant increase in prices, he gradually gets used to the idea: goods and services will never become cheaper and the whole question is to correctly predict how exactly they will become more expensive. Consumer decisions about what part of income to spend on current consumption and what to save are adjusted to such forecasts (adaptive inflation expectations).

It is clear that, trying to at least maintain his standard of living, the acquirer will increase current demand to the detriment of savings. This is exactly what, by the way, is happening in our economy, where adaptive expectations have become one of the main reasons for real consumer paranoia and the unbridled build-up of excessive demand, the leading link in the inflation mechanism. Manufacturers and traders, counting on higher prices, begin to slow down sales, hoarding the product, hoping to sell it at a higher price over time.

Unemployment— unemployment of the economically active population in economic activities. According to definition International organization labor, a person aged 10-72 years (in Russia 15-72 years old) is considered unemployed if, during the critical week of the population survey on employment problems, he simultaneously: . Didn't have a job. I was looking for a job. I was ready to get to work. The following types of unemployment are distinguished: . Unemployment: forced and voluntary. The first occurs when a worker is able and willing to work at a given wage level, but cannot find a job. The second is associated with people’s reluctance to work, for example, in conditions of lower wages. Voluntary unemployment increases during an economic boom and decreases during a recession; its scale and duration vary among people of different professions, skill levels, as well as among different socio-demographic groups of the population. . Registered unemployment — unemployed population searching for work and officially registered. . Unemployment is marginal— unemployment of vulnerable segments of the population (youth, women, disabled people) and the lower social classes. . Unemployment is unsustainable- caused by temporary reasons (for example, when employees voluntarily change jobs or quit in seasonal industries). . Unemployment is cyclical- caused by repeated declines in production in a country or region. . Unemployment is seasonal- depends on fluctuations in the level of economic activity during the year, characteristic of certain sectors of the economy. . Unemployment is structural- is caused by changes in the structure of demand for labor, when a structural mismatch is formed between the qualifications of the unemployed and the demand for available jobs. Structural unemployment is caused by large-scale restructuring of the economy, changes in the structure of demand for consumer goods and production technology, the elimination of obsolete industries and professions, and there are 2 types of structural unemployment: stimulating and destructive. . Technological unemployment— unemployment associated with mechanization and automation of production, as a result of which part of the workforce becomes redundant or requires a higher level of qualifications. . Unemployment is institutional- unemployment that arises in the event of intervention by the state or trade unions in establishing wage rates different from those that could be formed in a natural market economy. . Unemployment is frictional- the time of voluntary search by an employee for a new job that suits him to a greater extent than his previous workplace.
Inflation(Latin: Inflatio - inflation) - the process of reducing the value of money, as a result of which the same amount of money after some time can buy a smaller volume of goods and services. In practice, this translates into increased prices.
The opposite process is deflation - a decrease in prices (negative growth). IN modern economy It is rare and short-term, usually seasonal. For example, grain prices tend to decline immediately after harvest. However, deflation is characteristic of the economy.
The mechanism of inflation:
1. The total volume of goods that can be purchased with the money supply available in a given economic system may grow more slowly than the volume of the money supply, or even decrease - in this case, the cost of goods increases, and the value of money decreases.
2. The ratio of the volume of goods and the volume of money is not directly related, but takes into account the speed of turnover of the money supply in a given system. With an increase in the speed of money turnover, this will be equivalent to an increase in the money supply without changing the commodity supply.
The level of inflation is significantly influenced by the volume of money supply withdrawn from direct consumption through long-term investments that do not provide for quick returns, the level of deposits held in banks, the value of the refinancing rate, and so on.
In economics, the following are distinguished: reasons for inflation:
1. An increase in government spending, to finance which the state resorts to money emission, increasing the money supply beyond the needs of commodity circulation. This is most pronounced during war and crisis periods.
2. Monopoly of large firms on determining prices and their own production costs, especially in the primary industries;
3. The monopoly of trade unions, which limits the ability of the market mechanism to determine the level of wages acceptable to the economy;
4. A reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in the rate of inflation, since the same amount of money corresponds to a smaller volume of goods and services;
Types of inflation:
Inflation is the process of depreciation of money as a result, for example, of the overflow of commodity circulation channels with the money supply. Inflation results from macroeconomic instability when aggregate demand exceeds aggregate supply. Uneven price increases across product groups generate inequality in profit rates and stimulate the outflow of resources from one sector of the economy to another (in Russia, from industry and agriculture to trade and the financial and banking sector). There are modern theories of inflation that allow us to determine its types: open inflation and suppressed inflation. Open inflation is characterized by macroeconomic disequilibrium in the direction of demand, in which the real value of money falls. Species open inflation: . Demand inflation - is generated by an excess of aggregate demand compared to the real volume of production. (Shortage of goods). Supply (cost) inflation means an increase in prices caused by an increase in production costs in conditions of underutilized production resources. Increasing unit costs reduces the volume of products offered by manufacturers at the existing price level. . Balanced inflation - the prices of various goods remain constant relative to each other. . Unbalanced inflation - the prices of various goods change in relation to each other in different proportions. . Projected inflation is the inflation that is taken into account in the expectations and behavior of economic entities. . Unpredicted inflation comes as a surprise to the population, since the actual growth rate of the price level exceeds the expected one. . Adapted consumer expectations are a phenomenon associated with the deformation of consumer psychology. Extremely increased demand for goods allows entrepreneurs to raise prices for goods. (Demand creates supply).
Suppressed inflation characterized by external price stability (with active government intervention), but an increase in the shortage of goods, which also reduces the real value of money.
Depending on the growth rate, there are:
1. Creeping (moderate) inflation (price increases of less than 10% per year). Western economists consider it as an element of normal economic development, since, in their opinion, slight inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates payment turnover, reduces the cost of loans, contributes to the intensification of investment activity and the growth of production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. The average inflation rate in EU countries in recent years has been 3-3.5%. At the same time, there is always a danger that creeping inflation will escape state control. It is especially great in countries where there are no proven mechanisms for regulating economic activity, and the level of production is low and is characterized by the presence of structural imbalances;
2. Galloping inflation (annual price increases from 10 to 50%). It is dangerous for the economy and requires urgent anti-inflationary measures. Predominant in developing countries;
3. Hyperinflation (prices are rising at an astronomical rate, reaching several thousand percent per year, or over 100% per month). It paralyzes the economic mechanism and causes a transition to barter exchange. It is also characteristic of countries in certain periods when they experience a radical change in their economic structure.
The expression chronic inflation is also used for long-term inflation. Stagflation is a situation where inflation is accompanied by a drop in production (stagnation).
Analyzing the economy and the means of influencing it, economists drew attention to the fact that policies aimed at reducing the unemployment rate were accompanied by rising prices and, conversely, deflationary policies led to an increase in the unemployment rate.
However, in the 70s in Western countries akh began to observe a stable combination of high rates of inflation and high levels of unemployment with stagnation in production, called stagflation.

The relationship between unemployment and inflation .
Inflation has a strong impact on employment. In 1958, the English economist A. Phillips proposed a graphical model of demand inflation that expresses such an impact. Using English statistical data for 1861-1956 in his work, he constructed a curve that clearly shows the inverse relationship between changes in wage rates and the unemployment rate. Phillips concluded that the government could use increased inflation to combat unemployment. If the government considers the unemployment rate in the country to be extremely high, then budgetary and monetary measures are taken to stimulate demand to reduce it. This leads to the expansion of production and the creation of new jobs. The unemployment rate is decreasing, but at the same time the inflation rate is increasing. This situation forces the government to introduce credit restrictions, reduce expenditures from the state budget, etc. As a result of these reciprocal government actions, the price level will decrease and unemployment will increase. It has been established that the Phillips curve can be used to combat unemployment only in conditions of moderate inflation at a constant rate. In other words, the relationship established by the Phillips curve is not valid for long periods of time. Converting unemployment into inflation using this method is dangerous for the economy due to unpredictable consequences. As a result of this negative feature, the governments of most Western countries, including the USA and England, switched to the theory of the natural rate of unemployment, which is still used today. The essence of this theory is that in the long term, an acceptable level of inflation is possible only with a natural rate of unemployment. The natural rate of unemployment should be determined by the structure of the labor market, taking into account information about the needs in various industries. It should be noted that this policy of ensuring a natural level of unemployment and reducing inflation to moderate and stable does not always achieve its goals. Despite all the positive factors of this method, it has a rather important drawback: when the natural level of unemployment is reached, inflation continues to increase for some time, as if by inertia: its rate cannot quickly decrease. It should also be noted that natural level unemployment is not always socially acceptable. M. Friedman paid much attention to the problems of the connection between unemployment and inflation. His view of the instability of the Phillips curve is based on the concept of the natural rate of unemployment, which is understood, given the structure of supply and demand in the economy, as the rate of unemployment at which real wages and prices are stable. He distinguishes between short-run and long-run Phillips curves. The first is characterized by a negative slope, and the second is vertical. His conclusions: “the government should abandon demand regulation aimed at completely eliminating unemployment, since its reduction below the natural norm is associated with inflation; Since keeping high inflation within manageable limits does not guarantee the achievement of full employment, it is preferable to have no inflation as a goal rather than full employment.

Inflation- increase in the general level of prices for goods and services. With inflation, the same amount of money will, over time, buy fewer goods and services than before. In this case, they say that over the past time the purchasing power of money has decreased, money has lost part of its real value.

The opposite process is deflation - a decrease in the general price level (negative growth). In the modern economy, it is rare and short-term, usually seasonal in nature. For example, grain prices tend to decline immediately after harvest.

The term “inflation” appeared in the second half of the 19th century, migrating from the arsenal of medicine. Literally translated from Latin, inflation means "bloating", i.e. overflow of circulation channels with excess paper money, not backed by a corresponding increase in the mass of goods.

Inflation is a phenomenon of disruption of monetary circulation and is associated with various monetary factors: the issue of tokens of value, the volume of money supply, the speed of money turnover, the amount of mutually extinguishing payments.

It is obvious that inflation is a process caused by the interaction of two factors - pricing and monetary. On the one hand, the depreciation of money is a process associated with rising prices; on the other hand, a fall in the purchasing power of money can also occur under the influence of a change in its quantity in circulation.

Causes of inflation:

1. An increase in government spending, to finance which the state resorts to money emission, increasing the money supply beyond the needs of commodity circulation. This is most pronounced during war and crisis periods.

   Above-plan expansion of the money supply due to mass lending;

   Monopoly of large firms on determining prices and their own production costs, especially in the primary industries;

   The monopoly of trade unions, which limits the ability of the market mechanism to determine the level of wages acceptable to the economy;

   A reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in prices, since the same amount of money corresponds to a smaller volume of goods and services.

2. Forms and manifestations of inflation

1. Depending on the growth rate, there are:

creeping(moderate) inflation(price growth less than 10% per year). Western economists consider it as an element of normal economic development, since, in their opinion, slight inflation (accompanied by a corresponding increase in the money supply) is capable, under certain conditions, of stimulating the development of production and the modernization of its structure. The growth of the money supply accelerates payment turnover, reduces the cost of loans, contributes to the activation of investment activity and the growth of production. The growth of production, in turn, leads to the restoration of equilibrium between the commodity and money supply at a higher price level. The average inflation rate in EU countries in recent years has been 3-3.5%. At the same time, there is always a danger that creeping inflation will escape state control. It is especially great in countries where there are no proven mechanisms for regulating economic activity, and the level of production is low and is characterized by the presence of structural imbalances;

Galloping inflation(annual price increase from 10 to 50%). It is dangerous for the economy and requires urgent anti-inflationary measures. Predominant in developing countries;

Hyperinflation (prices rise at astronomical rates, reaching several thousand and even tens of thousands of percent per year). It arises due to the fact that the government issues an excess amount of banknotes to cover the budget deficit. It paralyzes the economic mechanism and causes a transition to barter exchange. Usually occurs during periods of war or crisis.

demand inflation;

supply inflation;

In demand-pull inflation, an imbalance between aggregate demand and supply occurs on the aggregate demand side. This type of inflation occurs when the purchasing power of the population does not have commodity coverage.

The mechanism of unwinding inflationary demand is characterized by the fact that first the money supply increases, and then aggregate demand.

Supply inflation occurs as a result of a reduction in aggregate supply due to an increase in the cost of production by 1 unit.

The increase in costs occurs due to the monopoly of enterprises, the action of trade unions, the use of imported resources, administrative regulation, etc. At the same time, the mechanism of inflation is characterized by the fact that initially, due to rising costs, prices increase, and then there is an expansion of the money supply.

Inflation can exist in two forms:

1) open – i.e. explicit price increases;

2) hidden or suppressed - its manifestations are that price increases occur due to a shortage of goods, and price increases are observed hidden only on the black market.

3. Regularities of the inflation processThere are three stages in the development of inflation.1.1 . At the first stage of inflation, the rate of depreciation of money lags behind the rate of growth of the money supply in circulation. This is explained primarily by a slight increase in the need for money circulation as a result of the artificial revival of production during the war boom, a reduction in credit and a slowdown in the velocity of circulation of money. At this stage of the inflation process, the state's emission income grows, a significant part of which is appropriated by monopolies. It is characteristic mainly of the inflationary environment during the years of pre-war militarization of the economy and during the war until the growth of unproductive state expenditures leads to economic breakdown, a decrease in the growth rate, and subsequently to a reduction in production volume. The rate of depreciation of money lagging behind the rate of growth of the money supply can persist throughout the war if the state introduces strict regulation (“freezing” prices and rationed distribution of products).

1.2 . At the second stage of inflation, the rate of depreciation of money exceeds the rate of growth of the money supply in circulation. The reason for this is the increasing disproportion between the volume money circulation and the real needs of cash turnover. A similar ratio is observed in a period when inflation is not able to stimulate the growth of production and trade turnover or prevent a reduction in their volume, and the mechanism of state regulation of prices is absent or is ineffective. The depreciation of money causes distrust in it. An escape from money begins, that is, the desire to turn it into real values ​​- goods - as quickly as possible. An increase in the velocity of money circulation further reduces the turnover's need for money and, along with the growth of the money supply, increases inflation. At this stage, the state may completely lose control over inflation, and then the rate of emission is controlled by the spontaneously operating mechanism of money depreciation. With high rates of price growth, a “money famine” occurs, since the state does not have time to print money; various surrogates appear.

1.3. The third stage of inflation is characterized by an intermittent relationship between the rate of emission and the rate of depreciation of money. Similar phenomena are observed during the peaceful development of the economy in conditions of the general crisis of capitalism, especially at its present stage, when inflation has become the object of state-monopoly regulation. The rate of average annual depreciation of money sometimes exceeds the rate of growth of the money supply in circulation, sometimes it lags behind. The third stage of the inflation process is characteristic of the so-called creeping inflation.