Inflation is a situation in which the channels of money circulation are overflowing with money supply. This situation is manifested in the growth of prices for goods. This problem is quite important in the economy, since its consequences can seriously affect the economic security of the state.
Concept and types
Inflation is understood as a process in which the monetary unit depreciates, and the prices of goods increase significantly. Due to many global factors, such as changes in pricing processes, complexities in production structures, reduced price competition and others, inflation is part of the market economy. A prerequisite for inflation is the dynamics of price increases, and one of the main reasons for its occurrence is the increase in government spending and insufficient budget.
There are three types of inflation - moderate, galloping and hyperinflation.
Moderate inflation is also called creeping inflation. It manifests itself in a relatively small increase in prices. Some analysts believe that this type of inflation is even useful and has a beneficial effect on the development of the economy, since its moderate rates allow money to maintain a stable value.
The second type of inflation can create significant tension in the economy, however, even then, prices can be predicted. Its beginning is manifested in the growth of the money supply, which outstrips the rise in prices. At the moment when the galloping inflation reaches its main stage, barter transactions begin to flourish.
In conditions of hyperinflation, prices can rise by 300% or more per year. It is the reason for the loss of money of its value and accumulation function.
Inflation rate
Changes in prices over a period, expressed as a percentage, reflect the rate of inflation. It can vary as the purchasing power of funds changes.
The normal value of the inflation rate in a developed market economy is considered to be a growth rate of 2 to 5% per year. The inflation rate can rise sharply in the event of an increase in non-production costs of the state, a commodity deficit or insufficient funds in the state budget.
In order to measure the inflation rate, three indices are used: the index of wholesale prices, consumer prices, and the GNP deflator. The first one displays the sum of the total turnover of the wholesale trade during the year, excluding retail sales. The second is the ratio of the prices of the consumer basket of the current year to the prices of the base year. The GNP deflator is an indicator of the average level of prices for services and goods that form the gross national product.
