What is inflation?

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Introduction

By reading the article “What is inflation?” Published in the Adaas Capital, you are generally introduced to the concept of inflation and its dimensions in the economy. This level of familiarity can be enough for you to invest in analyzing economic data. Join Adaas Investment Magazine to answer the question “What is inflation?”.

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What is inflation?

The economies of different countries change in each period of time and are constantly experiencing many ups and downs. One of the important concepts in macroeconomics is to study and measure the rate of inflation in a country.

How to measure inflation is possible using the tool of inflation indicators or inflation indicators, which is different in different countries depending on economic parameters and their characteristics.
Inflation is simply described as a comprehensive, stable, and widespread increase in the weighted average of prices in the economy. In other words, inflation is an uncontrolled and continuous increase in the general level of prices.

Various causes and manifestations of inflation

Inflation occurs in different ways in each economy according to different times and conditions. In this section, we want to examine the different types of inflation and the reasons for its occurrence.

Inflation due to increased demand over supply (demand inflation)

Whenever in a society the total demand exceeds the total supply, the excess demand over the current supply causes the general level of prices of goods and services to rise. Thus, the economy will face demand inflation. The supply of goods and services may be in short supply as the economy approaches employment or makes full use of existing capacities, and may not be able to respond quickly to the growing demand. An increase in the general level of prices in such a situation will not be very effective in increasing the incentive to increase production and supply, and in fact, can not have much effect on the growth of production and total income.

Demand inflation can occur in the economy for two main reasons:

  • Demand inflation due to overgrowth of money supply
  • Demand inflation due to the growth of one of the indicators of national production or the demand of the whole economy

Examples of demand inflation:

  • When consumption and various indicators such as consumption expenditures, ultimate desire to consume, personal income, and disposable income for some reason jump or grow significantly, in this case, the total supply is not able to meet demand and inflation occurs.
  • An economy that is constantly facing a government budget deficit, and an increase in government expenditures or a reduction in government revenues financed through existing budget deficit policies, may increase demand and cause inflation.
  • Changes in net exports are another factor in the pressure on aggregate demand. And increase services. Sometimes customs restrictions, economic sanctions, or changes in a country’s exchange rate reduce imports. These factors can lead to an increase in aggregate demand and, consequently, inflation.

Cost Inflation

If we see an increase in production costs or an increase in the price of factors of production in the economy, then this issue can be a factor in causing inflation. Various reasons, including rising commodity prices and rising labor prices due to the rise of trade unions, have been attributed to cost inflation. In principle, these factors, which are due to the growth of prices of production inputs, increase rates in the market of factors of production, and the cost pressure is imposed on enterprises and factors of production.

Inflation follows rising prices in a part of the economy

When one sector of the economy faces an increase in the general level of prices, it may put inflationary pressure on other sectors of society. In economics, due to a principle called price stickiness, when the price of one sector rises, this price increase automatically penetrates other sectors and creates a price stickiness.

Inflation due to imports

Sometimes in some developing countries, if a country’s economy is heavily dependent on other countries for imports, the probability of import inflation is higher. The administrative structure and economy of the country, lack of recognition of the potentials of the industry and production sector, government monopoly, and some cultural issues can be the causes of inflation.

Analysis of the dimensions of inflation

Inflation is constantly changing due to the instability and uniformity of the economy, as this feature helps the male government to use the monetary policy and manipulate inflation by interest rates to cast doubt on the economy. It is divided into three categories:

Creeping Inflation

In this type of inflation, inflation is slowly rooted in the economy and its growth rate is very low. The inflation rate in countries with creeping inflation is below 10%.

Galloping Inflation

For different countries, high inflation is in the state that the inflation rate is between 10 and 25 percent. In the long run, it destroys people's trust.

Hyper Inflation

This type of inflation is seen in countries where there is no stability in their economies. Statistical data can be used to refer to South American countries. For example, we can mention the severe inflation that plagued Bolivia in the 1980s.

The relationship between inflation and unemployment

The relationship between inflation and unemployment is completely inverted, or in other words, the two are moving in opposite directions. In economics, the Phillips curve is used to show this relationship. Arthur W. Phillips, who studied economics and statistics in 1958, discovered that the curve between inflation and Phillips’ unemployment had been discovered. This means that governments and economists can manipulate inflation by using interest rates and other factors to change inflation and manage the country in economic crises. In principle, lower inflation in the economy is possible only at the expense of higher unemployment or lower unemployment at the expense of higher inflation.

The end words

At Adas Capital, we hope that by reading this article you are fully acquainted with the answer to the question “What is inflation?” You can help us improve by sharing the article “What is Inflation” Published in Adas Investment Magazine, and help optimize this article by submitting your comments.

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