Understanding the Different Types of Inflation
First and foremost, any type of inflation entails an increase in the level of prices of all, or almost all, goods in an economy, a phenomenon all of us are already aware of. All of us have tried to remember when during the former Soviet Union, for example, rents were low and there were not such high lunch costs. And we have all observed the gradual increase in prices for everything from milk to movies. This focus will categorize inflation under several types and also relate suggestions around it from various schools of economics.
Stagflation and Hyperinflation: Clear Unwanted Fluctuations
Consumers may not be comfortable with increasing prices although many economists see these losses as a positive aspect in the case of any economics in moderation. Central banks on the other hand tend to work within the parameters of two to three percent appreciation in inflation. Once this level has been considerably passed, there are fears of hyper inflationary conditions which are the worst extremes of inflationary tendencies.
Examples of hyperinflationary periods are not uncommon in history. The most well known is the German hyperinflation of 1923 when the rate of prices was rising at 30000 percent every month. An even more dramatic case is Zimbabwe, where according to the research of Steve H. Hanke and Alex K. F. Kwok, the inflation rate in Zimbabwe in November 2008 was measured at 79,600,000,000 percent monthly.
This economic condition of stagflation which encompasses both inflationary and recessionary conditions is also quite detrimental. It occurs when gross economic pain is combined with soaring inflation, high levels that also have poor employment opportunities and most times gross challenges of economic growth. The phenomenon of stagflation is rare to find in today s world but it was witnessed in the US and UK economies as recent as in the 1970 s a situation which annoyed both countries in central banks.
From the point of view of the implications for macroeconomic policy makers, stagflation creates a more perplexing problem, since it makes the diagnosis and the treatment of economic problems more complex and difficult. Most of the time, central banks respond to this inflation supervision by trail and error and interfere with the rates increase by either lowering them or jacking them up high. Increasing the interest rate, which helps to quell inflation is counterproductive as unemployment levels already at stagflation are worsened when this step is undertaken. Everybody agrees to that lowering the interest rate at this stage during the higher level of stagflation caused by the high unemployment level should help cure the dependency of the economy. Therefore, stagna it seems to be a checkmate for central banks also since others do not seem to have such ‘weapons’. It is probably the most intricate type of inflation that sickness management is required for.
Negative Inflation
Negative inflation, which is the more common term used for deflation, is a state where the general price level declines for any number of reasons. With less money in circulation, the money available gains in worth and prices become lower. A decline in demand also has a similar effect and this can happen because of excess supply or because consumers are not willing to spend as much. Deflation may sound like an advantage since it means things become cheaper, however, with time, it is detrimental to the economy. Since the revenue from their products decreases, companies tend to want to reduce their rates of production, or even retrench, leading to greater unemployment rates.
What Causes Inflation?
Inflation is a term that most people have been familiarized with to a moderate degree and thus defining it is not the hardest task. Nevertheless, stating the reasons of this phenomenon is a more difficult and baffling task. Various explanations exist, however, Karl mark and Milton Friedman have drastically different views on inflation.
The former believes that inflation is purely a monetary phenomenon and is caused by the increasing supply of money which can only be controlled through direct regulation of the growth of monetary aggregates by the central banks. The former believes that inflation is most often a symptom of some economic strain, such as increased costs of production, and suggest active government action to curb it.
Keynesian Economics
The Keynesian school’s theory is derived from the name of economist John Maynard Keynes of Britain (1883-1946). The modern transformations of Keynesianism do not stop, but the core of the Keynesian school is its stress on total demand as the moving force in economic progress. There is a tendency to support measures at the legal level, or at the level of fiscal and monetary policies to influence the economy and its workings, such as creating more jobs or preventing swings in the business cycle. They understand that inflation arises due to pressures in the economy, such as an increased demand for goods as well as a shift in production’s cost. Indeed, they describe two central spheres of inflation, which are cost-push inflation and demand-pull inflation.
- Cost-Push inflation occurs when prices of factors of production like capital, land, labor, and entrepreneur(human) costs go up. Because of their wish to keep some profit, producers increase prices of their goods and services. Because of cost-push factors, when these costs increase in the economy, the producers tend to pass the cost increase to the consumers making the price to increase.
- Demand-pull inflation is when the total demand is higher than the total supply of goods and services. For example, there is an increase in the unit price where there is more effective demand for a good than the supply of that good. The demand-pull inflation theory addresses that in an economy where there is demand that exceeds the supply of aggregate resources, there is going to be an increase in the cost levels.
Monetarist Economics
Monetarism as a school of thought is associated with American economist Milton Friedman (1912-2006) and it attributes a lot of significance to the money supply and how changes in the money supply can influence economic developments. Monetarists are quite sceptical about the ability of the state to affect economic outcomes to the extent liked by the Keynesians. Friedman once wrote the book “A Monetary History of the United States” persistent even under the editorship of Anna J. Schwartz stating that the actions undertaken by the Federal Reserve authorities made the that the period of the Great Depression even worse. Because of this skepticism, Friedman advanced the idea that the central bank’s task does not go beyond ensuring that the money supply grows steadily, at a rate commensurate with the expansion of GDP. Inflation is explained by the monetarist school as a result of the process of money supply expansion. This view is articulated by Friedman’s assertion that ‘inflation is always and in all cases and everywhere a monetary phenomenon rather than fiscal’. Based on monetarists, inflation does not come about because of labor, raw materials or demand for goods and services, but because of money.
The proposition of a controlled scope includes the concept of money supply which explains the relationship that exists between the money supply with inflation in the working equation, MxV = PxT, where: At this point of discussion, let M be the money supply, let V be the velocity of money, P is the average price level and T is the volume of any transaction in relation to time.
M X V = P X T (Absorption Approach) The theory purports that if the velocity of money and the number of transactions remain constant, an increase or decrease in the money supply will result in a corresponding increase or decrease in the overall price level. Even though in practice this situation never holds, as the velocity of money and the number of transactions are relative dynamics, this expression would be a good representation of monetarists’ views on the cause of inflation by the increase of the money supply.
The Bottom Line
Inflation is always there in varying degrees, be it extreme cases like hyperinflation and stagflation or the small price increases that perhaps go unnoticed. Inflation is a challenge and such economists as the Keynesians and the monetarists have their own points of view as to what causes inflation indicating that this problem is very complicated in its nature.
