What is Inflation? What are the effects and characteristics of inflation? Information about inflation.
What is Inflation?
Inflation is nothing other than a sustained increase in the general level of prices. You can experience this when you go to the market and you notice that with the passing of the days the items you need each time cost more, and you feel that your purchasing power has been decreasing.
There are those who affirm that inflation is one of the worst scourges that a society can experience, especially the salaried class, since while wages and salaries generally remain at the same level, prices tend to increase faster, and this can degenerate into a increase in poverty.
What are the causes?
The general theory accepts that inflation can occur on the demand side of goods, on the side of costs, and on monetary expansion. When demand significantly exceeds the supply of goods or services, prices tend to rise. For example, if people start demanding more bread, and bakers for some reason can not increase their supply, the price of bread will rise.
If the costs of raw materials or wages increase, producers tend to transfer the new costs to the price of the final product. This means that if the price of wheat increases, the bread will be more expensive.
The third factor to consider is the expansion of the money supply. When the central bank adopts an expansive monetary policy, the new money created enters into circulation in the economy through an increase in bank credit and government spending. As the money reaches the population, it increases consumer spending, that is, increases demand.
If production does not increase at the same rate of demand, inflation will skyrocket. For the Austrian School inflation is a strictly monetary problem, since as can be seen, the increase in the money supply can increase the demand for consumption and production costs.
Inflation can affect in different ways if you are a saver, investor, lender, or consumer. If you are a saver and the interest rate you receive for the money you have saved in the bank is 2% per year while the inflation rate is 5%, it means that the real rate is -3%. A negative savings rate.
If as an investor you get a return of 5% per year and inflation is 6%, your actual return will be -1%. Therefore, one of your goals as an investor or saver will be to obtain a higher return than inflation.
The effects of consumer inflation are well known. People feel that they no longer have the salary to maintain their standard of living and will try to increase their income or resort to debt, otherwise they will have to experience a drop in their standard of living.
Also when purchasing power decreases, employees tend to demand an increase in wages and if they do, companies will transfer the increase in costs to the final price of the product, creating an inflationary spiral. Inflation is also detrimental to the lenders of fixed amounts, since the value of the loan they granted is lost over time, but for the same reason it can be beneficial for the debtors.
And what is hyperinflation?
Hyperinflation occurs when the rate of inflation accelerates to a rate higher than 50% per month, and generally occurs when the central bank adopts an aggressive policy of monetary expansion.