Inflation is the process of increasing prices for goods and services, as a result of which the purchasing power of the population falls. The causes of inflationary processes can be very diverse.
Previously, inflation occurred mainly during wars. Today inflation is an indispensable attribute of a market economy. She is her destabilizing factor. Among the main reasons that cause inflation are monetary, structural and external.
Monetary reasons
Theoretically, inflation is a consequence of the overflow of money supply, i.e. occurs when demand exceeds supply. An excess supply of money depreciates them, which entails an increase in prices for goods and services.
Distinguish between demand inflation, when production does not keep up with the growing demand for goods, and supply inflation, when the rise in prices is provoked by an increase in production costs.
In order for inflation to be replaced by the reverse process - deflation, it is necessary to ensure a decrease in the money supply with a constant volume of the commodity market.
Monetary factors include the unjustified emission of money for the short-term needs of the state, as well as the presence of a budget deficit. In the latter case, inflation occurs due to additional money emission, which is used to pay off the state debt. Inflation can be the result of overinvestment, when its volume exceeds the needs and capabilities of the economy.
The outstripping growth of wages, which does not correspond to the growth rates of industrial production and does not contribute to an increase in labor productivity, also depreciates money.
Structural reasons
Structural inflation is caused by the sectoral imbalance of the economy and the inefficiency of the existing management system. For example, inflation can be caused by the monopolization of the economy, when producers can independently influence the price level, because must not maintain competitiveness in the market. Inflation often arises as a result of collusion between producers or suppliers who raise prices to increase their own revenues, and not under the influence of market reasons.
Excessive militarization also negatively affects the economy. It entails a lag in the development of the consumer sector, increases GDP without increasing production potential, i.e. there is a commodity and budget deficit.
External causes
Inflation can also arise under the influence of external economic conditions. For example, with an excessive inflow of foreign exchange and an increase in import prices. Also, external causes of inflation include a negative foreign trade balance of payments, when imports significantly exceed exports.
Other reasons
The practice of recent years proves that inflation is not only an economic, but also a socio-political phenomenon. For example, the term "inflationary expectations" is widely known. It means that if society expects prices to rise, it will soon happen.
