Inflation: What is it and it's causes
Inflation, in modern macroeconomics, is considered to be a disfunctionality.
Thru out its consequences, inflation, is set to be one of the most disastrous disfunctionality, being related to the evolution of currencies and prices, and thru them it is a permanent danger for a country to prosper and develop.
Basically, inflation represents the loss in purchasing power for a given currency. In a wider way, it represents the flooding of market’s channels with a very large amount of money, that can’t be absorbed in assets, which leads to a depreciation of money related to gold. In other words, a monetary unit will buy less gold, being subject to the supply and demand relations. The imminent result of inflation is the rise in prices of assets and services, and in the same time the lost in purchasing power (as stated before).
A little bit of history…Inflation is not a modern phenomenon, it’s know, even not in the actual form, since the begging of the coin thru physical wear (coins became smaller and smaller from friction). During the Roman Empire, emperors changed the proportion of silver from coins with other metals (copper). Even if the Roman Senate gave some laws trying to restrict inflation, prices still raised a couple of time.
The inflationary rise in prices is a general process and in a long term will eventually pull, at different paces, all costs. This rise is influenced by a series of factors like: the faster growth in demand then in supply (people have more money and they want more goods), the rise in production costs (production factors will cost more and more, including labor) and of course the all favorite rise in taxes and duties (mainly, because of the devaluation of the currency).
In general, inflation is determined by: a bigger monetary issue related to market demand in order to cover the current account; money supply remains constant, but the amount of economical assets it’s reduced dramatically. Also, inflation can also be evidenced by the relationships between money supply and GDP (Grow Domestic Product): the money supply, or of its different component, faster then the pace of GDP; the diminish of GDP without a proper diminish of money supply.
The grow in money supply can be appointed to more factors. One of these factors is the deficit of the current account, the faster growth in outgo then in savings of our government. This is usually covered by a loan from the Central Bank (Fed, BoE, BoJ). Another reason why money supply grows is because of the “unattained” credit industry, which can lead to an uncontrolled and very large (dangerous too) money supply.
The military force also creates inflationist pressures, they demand money, but they don’t create any good or service (see the immense bill of the Iraqi war).
The inflationist spiral, also contribute to the grow in money supply, and it’s basically the race between the increase in prices and the increases in wages (usually wages lag).
Some governments that face stagflation or crises use the “cheap money policy”, injecting huge amount of capital in the economy.
There are also external conditions that can cause country inflation by raising the money supply. One of this reasons is the increase of prices for imported goods, which also lead to an increase in goods produced in own country. The second external cause of grow in money supply are currencies relationships, the immense supply of foreign capital in other currencies (mainly dollars) which “go” without any control from one country to another searching for the best yields.
Of course, these were only some basics things that lead to inflation. In real life (look on the window) the mechanism of inflation is far more difficult and complex, and usually a conjecture of factors are the guilty ones. During the modern time of macro economy, two concepts were developed regarding inflation and it’s caused: the "monetarists”, lead by Friedman, who believe that monetary effects dominate all others in setting the rate of inflation, and the "Keynesians", lead by Keynes followers, who believe that the interaction of money, interest and output dominate over other effects. There were also some other theories like as those of the Austrian school of economics, believe that inflation is caused by an increase in the supply of money by central banking authorities.
Off course, inflation can take different intensities. It’s generally viewed an inflation under 3% as a slow one, and one under 10% as moderate. But inflation has it’s extremes as well: Hyperinflation and Megainflation. According to Wikipedia: Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 × 106 percent per month (prices double every 49 hours) Greece during its occupation by German troops (1941-1944) with 8.55 × 109 percent per month (prices double every 28 hours). The most severe known incident of inflation was in Hungary after the end of World War II at 4.19 × 1016 percent per month (prices double every 15 hours). More recently, Yugoslavia suffered 5 × 1015 percent inflation per month (prices double every 16 hours) between 1 October 1993 and 24 January 1994.
Of course, inflation doesn’t only do bad things, economist say that 5% inflation is generally good, causing a general sustainable growth, adding new jobs and maximizing profits.
Inflation, in modern macroeconomics, is considered to be a disfunctionality.
Thru out its consequences, inflation, is set to be one of the most disastrous disfunctionality, being related to the evolution of currencies and prices, and thru them it is a permanent danger for a country to prosper and develop.
Basically, inflation represents the loss in purchasing power for a given currency. In a wider way, it represents the flooding of market’s channels with a very large amount of money, that can’t be absorbed in assets, which leads to a depreciation of money related to gold. In other words, a monetary unit will buy less gold, being subject to the supply and demand relations. The imminent result of inflation is the rise in prices of assets and services, and in the same time the lost in purchasing power (as stated before).
A little bit of history…Inflation is not a modern phenomenon, it’s know, even not in the actual form, since the begging of the coin thru physical wear (coins became smaller and smaller from friction). During the Roman Empire, emperors changed the proportion of silver from coins with other metals (copper). Even if the Roman Senate gave some laws trying to restrict inflation, prices still raised a couple of time.
The inflationary rise in prices is a general process and in a long term will eventually pull, at different paces, all costs. This rise is influenced by a series of factors like: the faster growth in demand then in supply (people have more money and they want more goods), the rise in production costs (production factors will cost more and more, including labor) and of course the all favorite rise in taxes and duties (mainly, because of the devaluation of the currency).
In general, inflation is determined by: a bigger monetary issue related to market demand in order to cover the current account; money supply remains constant, but the amount of economical assets it’s reduced dramatically. Also, inflation can also be evidenced by the relationships between money supply and GDP (Grow Domestic Product): the money supply, or of its different component, faster then the pace of GDP; the diminish of GDP without a proper diminish of money supply.
The grow in money supply can be appointed to more factors. One of these factors is the deficit of the current account, the faster growth in outgo then in savings of our government. This is usually covered by a loan from the Central Bank (Fed, BoE, BoJ). Another reason why money supply grows is because of the “unattained” credit industry, which can lead to an uncontrolled and very large (dangerous too) money supply.
The military force also creates inflationist pressures, they demand money, but they don’t create any good or service (see the immense bill of the Iraqi war).
The inflationist spiral, also contribute to the grow in money supply, and it’s basically the race between the increase in prices and the increases in wages (usually wages lag).
Some governments that face stagflation or crises use the “cheap money policy”, injecting huge amount of capital in the economy.
There are also external conditions that can cause country inflation by raising the money supply. One of this reasons is the increase of prices for imported goods, which also lead to an increase in goods produced in own country. The second external cause of grow in money supply are currencies relationships, the immense supply of foreign capital in other currencies (mainly dollars) which “go” without any control from one country to another searching for the best yields.
Of course, these were only some basics things that lead to inflation. In real life (look on the window) the mechanism of inflation is far more difficult and complex, and usually a conjecture of factors are the guilty ones. During the modern time of macro economy, two concepts were developed regarding inflation and it’s caused: the "monetarists”, lead by Friedman, who believe that monetary effects dominate all others in setting the rate of inflation, and the "Keynesians", lead by Keynes followers, who believe that the interaction of money, interest and output dominate over other effects. There were also some other theories like as those of the Austrian school of economics, believe that inflation is caused by an increase in the supply of money by central banking authorities.
Off course, inflation can take different intensities. It’s generally viewed an inflation under 3% as a slow one, and one under 10% as moderate. But inflation has it’s extremes as well: Hyperinflation and Megainflation. According to Wikipedia: Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 × 106 percent per month (prices double every 49 hours) Greece during its occupation by German troops (1941-1944) with 8.55 × 109 percent per month (prices double every 28 hours). The most severe known incident of inflation was in Hungary after the end of World War II at 4.19 × 1016 percent per month (prices double every 15 hours). More recently, Yugoslavia suffered 5 × 1015 percent inflation per month (prices double every 16 hours) between 1 October 1993 and 24 January 1994.
Of course, inflation doesn’t only do bad things, economist say that 5% inflation is generally good, causing a general sustainable growth, adding new jobs and maximizing profits.
http://picnac.com/thumbs/8554200px-5...000_dinars.jpg
500,000,000,000 (500 billion) Yugoslav dinar banknote circa 1993, the largest nominal value ever officially printed in Yugoslavia, the final result of hyperinflation. Photo courtesy of National Bank of Serbia (www.nbs.yu)
"Abandon all hope, you who enter here"
La Divina Commedia, Dante Alighieri