Inflation is sustainable promotion the general price level of goods and services in the economy. The term comes from the Latin word inflatio – swelling. We are talking about a price increase, which is not due to an increase in quality – in fact, in this way appears depreciation of money. With inflation, you will have to spend more to buy a certain product than was required in the past. It is usually measured as a percentage, reflecting the increase in prices. Lenta.ru explains what processes cause inflation and how central banks try to resist it.
According to established world practice, as a rule, they talk about annual inflation – for a certain period of time compared to the same period a year ago. For example, a figure of 10% in July 2022 means that prices are up 10% at the end of the month from the level recorded in July 2021.
Most often under inflation Understood what is called the consumer price index (CPI). It allows you to assess how the cost of a certain set of consumer goods and services has changed – that is, the consumer’s basket. The CPI reflects the quality of life of the population and, moreover, it is convenient to use due to the clarity of the calculation methodology.
How is inflation calculated?
IN Russia IPC data publish The Federal Statistical Service – Rosstat, monitors the indicator weekly. To calculate the index, the agency sets the prices of 558 goods and services in 282 cities across the country in all regions.
Photo: Ilya Pitalev / RIA Novosti
To determine the CPI, Rosstat tracks a number of goods and services:
1. food
2. non-food items
3. drugs
4. fares in public transport
5. housing and communal services
6. travel services
7. cultural and entertainment services
To calculate the CPI, tracking is done in stores of different formats and markets. Particularity the Russian consumer’s basket is a fairly high share of food products, which is typical for all emerging countries.
15.1%
was inflation in Russia in July 2022
Similar indices exist in other countries. The European Statistical Office, assessing inflation in the euro zone, can resort also to the harmonized indicator for individual States, unifying the approach to calculations.
In addition, the world statistical offices offer estimate what is called core inflation: an indicator without taking into account volatile components such as food and energy costs.
Types of inflation
Inflation can to differ by growth rate. There are the following types:
1. low (creeping) inflation – up to 5% per year
2. moderate – up to 10% per year
3. high (gallop) – up to 50% per year
4. hyperinflation – over 50% and above, usually accompanies political crises and can be caused by the state’s decision to start a printing press: issuing money to finance its expenses.
Russia’s current double-digit inflation figures for 2022 correspond to high inflation (according to condition in July – 15.1 percent). IN UNITED STATES and the average inflation of the States of the euro zone by the summer of 2022 remains moderate, although higher than usual for developed countries.
Example of hyperinflation − Turkey. In the country fixed a surprisingly high figure for its overall economic development – almost 80% in July 2022.
Turkish President Recep Tayyip Erdogan
Photo: Eduardo Parra / Globallookpress.com
The reason has to do with the extraordinary ideas of the country’s president Recep Tayyip Erdoğancontrary to the opinion of most economists. This is not the first year that he puts pressure central bankdemanding that policies be adjusted according to their views, and brought before the current monetary crisis.
What is deflation?
Inflation can also be negative – this process is called deflation. Often it is set at a weekly level: for example, due to the seasonal factor, when vegetables and fruit become cheaper in summer. However, prolonged deflation, with which encounterfor example the economy Japanis also bad: people are starting to spend less, expecting price cuts, and businesses are running into trouble.
He is forced to reduce production and cut wages or reduce the workforce. People with no income reduce their spending further and a vicious circle ensues. In such cases, it is customary to speak of phenomenonlike a deflationary spiral.
Inflation factors
the reasons there may be several to alter the rate of price growth.
1. Inflation can be accelerated by demand: people are willing to spend money on goods or services, and their prices rise.
2. Lack of supply also affects. For example, it can be caused by a bad harvest or restrictions on the import of products from abroad, such as those which Russia faced in response to its military operation on Ukraine.
3. Inflation is accelerated by the growth of the producers’ costs directly for the production, as well as for the sale of their products. This may be due to an increase in the price of raw materials or materials, components, an increase in labor costs. Additionally, if costs increase significantly, companies may start to reduce production volumes – and then there is pressure due to a lack of supply.
4. There is also what is called the transmission effect: the influence of the exchange rate of the national currency. If it weakens, it becomes more expensive to import goods from abroad.
Photo: RIA Novosti
5. Serious impact render so-called monetary factors – those that can be influenced by the Central Bank of the country. Inflation accelerates when there is more money in the economy: due to emissions or due to lower interest rates on loans and deposits.
6. Price increases and large budgetary expenditures are stimulated – such as support measures or the indexation of social benefits. The situation is aggravated by the fact that the authorities often go there in conditions of already observed inflation, in the hope of reducing social tensions.
7. Among the significant factors, it is customary to speak separately of inflation expectations: how the population and businesses evaluate the prospects for price growth in the future. Expectations shape behavior: companies set the prices of their own products, citizens decide whether it is better for them to spend money or save. If a person thinks that in the future his funds will depreciate rapidly, he will prefer to buy the necessary goods with them now. Decisions therefore affect supply and demand, ultimately influencing the rate of inflation.
Where is the highest inflation in the world?
Typically, states publish data on consumer price growth with a certain frequency adopted in a particular case, presenting new information for a given period.
257%
represented the highest global inflation rate in July 2022
The actual numbers change constantly, depending on the evolution of the situation of the economy. The specific rating of states with the highest inflation also changes. However, among these anti-rulers, as a rule, there are countries in a state of political or military crisis, causing economic problems and great general uncertainty. Data for summer 2022 this model reflect.
Top 5 countries with the highest inflation (as of mid-2022):
1. Zimbabwe – 257 percent
2. Lebanon – 210 percent
3. Venezuela – 167 percent
4. Sudan – 149 percent
5. Syria – 139 percent
How Central Banks Can Resist Inflation
overwhelming majority global central banks targets inflation – seeks to maintain it within a certain indicator with the help of monetary policy. Developed economies are most often establish an inflation target of 2% and emerging market economies of 3% or more.
For the Central Bank of Russia, the indicator East 4 percent, but now actual price growth rates are several times higher than the target.
State interested keep inflation at a moderate level – rising prices affect the mood of society. Additionally, high inflation creates a situation of heightened uncertainty that affects decision-making, which can ultimately affect a variety of economic indicators.
To influence inflation, global central banks establish the main rate – in Russia it is called the key. The challenge is to regulate the level of demand for money in the economy.
Photo: Maria Devakhina / RIA Novosti
Through a chain of relationships, the rate affects a number of processes, and they ultimately determine the rate of consumer price growth. The value of money in the economy depends on its level – how much financing (both bank and by issuing bonds) costs borrowers.
When the rate is low, loans become cheaper, and therefore there is more money in the economy: the money supply increases. The funds are available to people and businesses, which in turn fuel demand for goods and services. At the same time, a low key rate makes the savings strategy less profitable, also encouraging people to spend more: as a result, deposit rates become lower. Growing demand, in turn, becomes a pro-inflationary factor.
However, keeping rates high all the time is not profitable because low rates have the advantage of stimulating the economy. They are used in recessionary situations to support the business with cheap loans. The task of regulators is therefore to find such a level of interest rate that is both acceptable for economic activity and sufficient to curb inflation. Accelerating demand, the Central Bank should not allow its excessive level.
Regulators seek to influence people’s inflation expectations: for example, the Bank of Russia affected on the evaluations of economic agents using its information policy, by addressing explanations both to the market and to individuals.
“The expectations of economic actors significantly affect the economy in general and inflation in particular. Therefore, the Bank of Russia explains in detail what happens to prices and why, and how the regulator affects this,” explain on the Central Bank’s website.