Inflation and its effects
Economists use the word inflation to mean the progressive increase in the price levels estimated in money units. The inflation rate also referred to as the degree of increase in prices, is said to be the percentage increase annually in the wide index of money prices. The rate of inflation changes every year from currency to currency. Overall inflation can be referred to as the ongoing fall in the general purchasing power of money. Currently, the central banks in many nations are concerned with keeping inflation low but positive. According to White (2018), although economies on silver and gold paradigms may sometimes suffer through inflation, the rates in said economies barely surpass two percent per annum, and the overall experience over centuries was a rate of inflation of almost zero.
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Causes of Inflation
Labonte (2011) states that in American History, an important change in price levels coincides with a corresponding alteration in the supply of money. The concept has brought about the perception that inflation is a fiscal phenomenon that occurs from and is followed by an increase in money quantity relative to production. Several views seek to explain the root of inflation. The first view is that the rapid money growth rate plays a significant role in inflation resulting from possible policies by the Federal Reserve that are mistaken or the Federal Reserve helps itself to the monetary requirements of the federal government. Through money creation, they finance budget deficits. This view has it that inflation control rests with the Fed (Federal Reserve) and is dependent on its readiness to restrict the growth in the supply of money. The other view is based on the common belief that the upward pressure exerted on the prices originates from activities generated to produce a fall in actual output. The best candidate is the trial by organized labor to obtain a rise in real wages (Labonte, 2011). Some other activities include significant changes in international trade caused by a drop in the value of the foreign exchange dollar and the monopolistic behavior of OPEC. The decline in actual output generated by the activities generally leads to an increase in unemployment.
Effects of Inflation on global and local economics
Prices change at different paces, and some, such as the value of traded commodities, are different each day while others, such as wages that are contact established, take a long time to adjust. An environment undergoing inflation consists of increasing prices that reduce the purchasing powers of some customers, and actual income erosion is one of the biggest causes of inflation. Moreover, inflation also changes the purchasing power of payers and recipients of fixed interest over time. Many countries around the globe have suffered from high inflation and, in other cases, hyperinflation, a thousand percent or more annually. For instance, Zimbabwe experienced the worst case of hyperinflation in 2008 (Oner, n.d). It has estimated yearly inflation at a particular time of five hundred billion percent. High inflation levels, such as in Zimbabwe, have been disastrous, and nations have been forced to take painful and difficult policy measures to bring inflation to reasonable levels.
Vienna (2022) states that there are two contending perspectives on the effect of globalization on domestic price increases. One perspective is that the worldwide inflation constituent is displayed mainly in the energy markets and price swings in commodities. Globalization can impact the underlying inflation, but the impacts are considered almost negligible. The alternative perspective is that global economic slack matters for basic domestic inflation. Globalization may have had much to do with lowering inflation sensitivity to local slack, i.e., the Phillips curve slope (Vienna, 2022). The contributing factors that have led to an increase in firms’ pricing power across developed economies include excess global savings and excess global demand for most of the goods and commodities traded internationally. This has fed into the underlying pressure on prices even in nations with domestic slack.
Vienna (2022) states that in the euro region, a robust surge in the price of sales has mitigated the effect of the unfavorable trade terms for high prices of commodities and has encouraged profits in the areas exposed heavily to global demand. In turn, the euro region companies have become the inflation exporters as much as they have become importers. The persistence and extent of the underlying pressures on prices may depend on whether high profits translate to high wages or the degree to which organizations will pass high input costs on to consumers. As the risks of the current high inflation are growing considerably, there is an urgency for action to be taken using the monetary policy to protect the stability of prices.
Inflation has been an ongoing problem that requires more attention. Price stability is one of the crucial variables which promotes growth in the economy and sustainable development. Most central banks’ primary goal is to maintain stable prices with increased growth rates. When money loses value, individuals lose confidence in cash as an exchange medium. The effect of loss of the importance of money is a decline in savings and, consequently, in investments and economic growth.
- Labonte, M. (2011). CRS Report for Congress Inflation: Causes, Costs, and Current Status. https://sgp.fas.org/crs/misc/RL30344.pdf
- Oner, C. (n.d.). Inflation: Prices on the Rise. Www.imf.org. https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm#:~:text=In%20an%20inflationary%20environment%2C%20unevenly
- Vienna. (2022). The globalisation of inflation. Www.ecb.europa.eu, 001(1). https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220511_1~e9ba02e127.en.html
- White, L. H. (2018). Inflation. Econlib. https://www.econlib.org/library/Enc/Inflation.html