Inflation in the economy - what is it, types, pros and cons

Updated July 24, 2022 428 Author: Dmitry Petrov
Hello, dear readers of the KtoNaNovenkogo.ru blog. How often do we hear this word in everyday life! But do we know exactly what this term means?

Let's try to figure out what inflation is, how it is classified and why it occurs.

Let's compare the inflation indicators of the Russian economy over the past two decades and try to draw conclusions.

Definition: What is inflation in simple terms?

Inflation (from the Latin “inflatio” - “inflation”) is an increase in prices for goods and services due to an increase in the total amount of money in circulation without an increase in the number of goods. This indicator is usually measured as a percentage of the previous period.

There are many other definitions of inflation:

• This is the process of devaluing money;
• This is a decrease in the purchasing power of money;
• This is a hidden tax on the population;
• This is the easiest way to steal your money;

The main cause of inflation is an increase in the total money supply without an increase in goods.

For example, if today you could buy 100 goods, then in a year you will be able to buy only 93 with the same amount of money.

In Russia, the process of rising prices is especially noticeable, since we have a developing economy, and for such countries, high inflation rates are a normal phenomenon.

For example, there is a small country with a total budget of 10 million rubles and there are 5,000 units of different goods. This means that one unit of goods costs 2000 rubles. A year later, there were 11 million rubles of money (printed), but there were no more goods. This means that money began to lose purchasing power, since in terms of conversion the goods already cost 2,200 rubles (10% more).

What is deflation

Deflation (from the English “deflation” - “deflation”) is the process of reducing prices for goods. It is the opposite side of inflation. Deflation has an extremely negative impact on the country's economy. Usually the Central Bank in this case begins to artificially depreciate money.

Inflation rate in Russia by year - comparative analysis

The state of the economy in the Russian Federation has significantly stabilized over the past 19 years. This can be seen from the graph showing the inflation rate (in %) from 1999 to 2022:

The Central Bank of the Russian Federation plans that by the end of 2022, inflation in Russia will be about 4% . If everything happens like this, then we can talk about the stabilization of the Russian economy in comparison with the crisis years of 2014–2015, as well as the correct course of the Government towards import substitution (increasing GDP at the expense of Russian producers).

Based on current economic indicators, the Ministry of Economic Development of the Russian Federation predicts that in the next few years (until 2024) the inflation rate will be at the level of 2022.

Remember: the higher the population's financial literacy, the stronger the country's economy.

Inflation index - what is it?

The inflation index is an economic indicator that shows the cumulative increase in prices in different categories of goods.

If one product has not risen in price, and another has risen in price by 5%, then the index will show a change of 2.5%, provided that they are included in the index calculation with the same weight.

Information on changes in the inflation rate is published every month, quarter and year. For example, for the month of March this level was 0.1%. It is always indicated for what specific period the indicator changed.

Inflation Index Formula

[price_index] = ∑(weighti × pricei); = 100 × [price_index - price_indexpred] / price_indexpred;

Where:

• price_indexpred is the total cost of all goods included in the calculation of the inflation index;
• weighti — weight coefficient of the i-th product;
• pricei — cost of the i-th product;

What goods are included in the inflation index
Not all goods affect inflation. It’s easier to name the list that is included in the calculation. These are essential products: bread, grain, flour, meat, sugar, potatoes.

Therefore, you should not be surprised if dairy products have risen in price by 20% over the year, while official inflation data indicate only 7%.

Types of inflation according to the degree of its anticipation and advertising

As you can see from the flowchart above, there are still quite a few classification options left. Let's look at the main ones.

By degree of predictability

Expected inflation implies that prices will increase at a pre-calculated rate.

You've probably heard on TV or read in the media: “It is planned that price increases will reach this percentage by the end of the year.”

This type of inflation does not harm the economy . Experts calculate price growth rates up to 5 years in advance. These values ​​are taken into account in production development planning and in bank lending (inflationary expectations are included in loan interest rates).

The concept of unexpected inflation speaks for itself: “you didn’t expect it, but I… am already here.”

Unpredictable price increases may be triggered by inflationary expectations of the population. What does it mean?

Let's say there is a rumor that sugar will rise in price 10 times due to a poor sugar beet harvest. What do citizens who have a certain amount of free money and are prone to panic do? Of course, they run to buy bags of sugar.

The result is that sugar disappears from store shelves, and sugar brought back from warehouses costs 5 times more. Such a development can only occur in an economy with high inflation expectations , which includes Russia. The psychology of the population, alas, has inertia and many remember the crazy “nineties”.

Another option for unexpected inflation (in an economy without inflation expectations): sugar prices have increased due to a bad harvest, and reasonable citizens are in no hurry to buy sugar, but are waiting for “everything to resolve.”

Expectations are justified: the manufacturer, seeing a drop in demand, is forced to reduce the price. And everything returns to normal. This turn of events in economics is called the “Pigou effect.”

By degree of openness

The wording “ open inflation ” means that price increases in a market economy occur according to the laws of the market mechanism and are not suppressed by the state.

Price increases in this case can occur due to 2 reasons:

1. an increase in the money supply in the country with a constant quantity of goods;
2. a decrease in the production of goods with a constant money supply.

Hidden (suppressed) inflation is the result of government intervention in pricing and total control over the income of the population. This means that prices are “frozen” by the state at a certain level, and income is limited to established limits.

An example is the economy of the USSR. A ban on price increases inevitably leads to the fact that it becomes unprofitable for the manufacturer to produce his goods. The result is a shortage, a decline in the population’s interest in the results of their labor. This type of inflation is dangerous not only for the economy, but also for the self-awareness of the nation as a whole.

Types and types of inflation

There are two types of inflation:

1. Open. Russia can serve as an example. Prices are rising and therefore the ruble is losing its solvency.
2. Hidden. Freezing prices at the same level, but at the same time creating a shortage. As a result, prices themselves rise on the unofficial market. An example would be the USSR.

Based on the rate of speed, there are three types of inflation:

1. Creeping (moderate). The figure does not exceed 10%. The best option for the country, since the economy in this case has every chance of development.
2. Galloping. The figure does not exceed 50%. There is no more GDP growth. If the Central Bank does nothing, the country will slide into default in a couple of years.
3. Hyperinflation. Over 50% per annum. The economy is collapsing before our eyes. People don’t believe in national money, so they immediately get rid of it if they receive it. Most often, this level manifests itself during periods of war.

Formula for measuring and calculating inflation

The above price index options can be used to calculate the amount of inflation between two specific months (or years). Although many ready-made inflation calculators are already available on various financial portals and websites, it is always better to know the basic methodology to ensure accuracy and a clear understanding of the calculations.

Inflation rate in percent = (final CPI index value / initial CPI value) * 100

Let's say you want to know how the purchasing power of $10,000 changed between September 1975 and September 2018. Price index data can be found on various portals in tabular form. From this table, take the corresponding CPI figures for the given two months. In September 1975 it was 54.6 (the initial CPI value) and in September 2022 it was 252.439 (the final CPI value). 3 Adding the formula gives:

Inflation rate in percent = (252.439 / 54.6) * 100 = (4.6234) * 100 = 462.34%

Since you want to know how much September 1975 $10,000 would be worth in September 2022, multiply the inflation rate by the amount to get the modified dollar value:

Change in dollar value = 4.6234 * $10,000 = $46,234.25.

This means that $10,000 in September 1975 would be worth $46,234.25. Essentially, if you purchased a basket of goods and services (as defined by the CPI) worth $10,000 in 1975, the same basket would cost you $46,234.25 in September 2022.

Causes of inflation - why prices rise

There are 4 global causes of inflation:

1. Demand inflation. Demand for goods outstrips supplies, which causes prices to rise;
2. Cost inflation. Increase in current production costs, rising prices for raw materials and labor;
3. The exchange rate of the importing country's currency decreases relative to the exporting country's currency;

• What is import;
• What is export;
• What is re-import;

Note If there is a surplus of goods and services, prices begin to decline.

What are the causes of inflation? Each country may have its own reasons and factors. Let's list the common points for everyone:

1. Constant emission of money without backing up the commodity component.
2. Mass lending and non-repayment of funds.
3. Shortage of goods, reduction in production.
4. War. Leads to very high inflation rates as the government prints a lot of money for military spending. The result is currency depreciation (devaluation). This approach is essentially one of the options for secretly collecting money from the population.
5. Increase in taxes.
6. The zero refinancing rate of the Central Bank or vice versa is extremely high: over 20%.
7. Geopolitical situation.
8. Sanctions of other countries.

In addition to these reasons, there may be others that are specific to a particular country.

Are there countries without inflation? There is almost no price increase in Japan, although they really want it. Another deflationary currency is the Swiss Franc (CHF).

It is beneficial for exporting countries to have a cheap national currency. For example, Japan is the largest exporter and it benefits from having a cheap Japanese Yen (JPY). The Central Bank of this country deliberately depreciates the Yen, keeping the lending rate negative or at zero.

Also, the Bank of China deliberately lowers the Yuan artificially.

INFLATION: ESSENCE, REASONS, FORMS OF MANIFESTATION

Inflation is a steady rise in prices, which ultimately depreciates the value of money, income and savings of the population. even the weakest inflation is fraught with enormous dangers for the development of a modern monetary economy. It is no coincidence that in the economic policies of all countries (including the most developed) anti-inflationary measures - primarily monetary measures aimed at limiting the growth of money supply - are of paramount importance. The famous English economist J.M. Keynes wrote back in the 20s of the last century (mainly under the influence of colossal post-war inflation in Germany, defeated in the First World War): “there is no more cunning, and at the same time more sure way to overthrow the existing social order than the depreciation of money.”

Science and life // Illustrations

After the currency reform in Germany (1923), junk dealers bought old banknotes by weight.

When inflation sweeps goods off store shelves, a line can line up for men's hats. Drawing by Danish cartoonist H. Bidstrup. 1950s.

Dynamics of the consumer price index in 1992 - 2001. For almost two years (from mid-1992 to mid-1994), the monthly growth rate of consumer prices exceeded 15%.

Annual growth rates of the consumer price index (CPI) in 2000–2008.

On the assembly line is Druzhba processed cheese, one of the great brands of the Soviet era, when prices for all goods were fixed.

Share of social expenditures in GDP as a percentage (2006). Data for developed countries do not include spending on education, which reaches 5-6% of GDP. In Russia, these expenses amount to 1.3% of GDP.

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CAUSES OF INFLATION AND HOW TO FIGHT IT

Inflation is a monetary phenomenon associated with an excessive release of money into circulation compared to the supply of goods. However, this increase in money occurs for various reasons. And the first of them is the growth of household incomes, which is not supported by a corresponding increase in the production of goods. This is how excess demand appears, pushing prices up - a phenomenon that is especially clearly manifested in a war economy. In this case, it is customary to talk about “demand inflation”.

Inflation is also caused by an increase in costs, which entails a rapid increase in prices for some goods or services of natural monopolies, for example, utilities. Then they talk about “cost-push inflation.” True, it is almost impossible to separate these two processes in real life, and debates about what came first - “the chicken or the egg,” demand or costs,

- often don't make sense. Both processes are interconnected. An increase in costs, and therefore prices, requires compensation for the dwindling income of the population (salaries, pensions, benefits, etc.). The new injection of money into the economy, in turn, increases demand, putting pressure on prices. And everything repeats itself in a new round of the vicious inflationary spiral.

Inflation can take many forms. In a regulated economy, primarily a planned, command economy (such as existed in the USSR), as well as in wartime conditions, when prices are fixed, it can be hidden in nature - this is the so-called suppressed inflation. Its companions include a shortage of many products, a surge in shadow trade, a sharp increase in prices in the markets, etc. However, the abolition of such regulation (after a war or in countries that have transitioned from an administratively regulated to a market economy) often gives rise to “galloping inflation” with wildly rising prices. It arises due to the so-called huge “money overhang”, in other words, the discrepancy between the cash supply of money and the insufficient quantity of goods.

Inflation is sometimes expressed in a relatively slow, almost imperceptible rise in prices - it is called creeping. However, the long-term consequences of such inflation have a very harmful impact on the state of the monetary system and the well-being of the population.

During periods when demand begins to exceed supply, inflation tends to increase. However, there are known periods (for example, the 70s of the twentieth century in developed countries) when inflation and a decline in economic growth rates combined into a new phenomenon called “stagflation” (stagnation plus inflation).

The so-called waiting moments play a significant role in the development of the inflation process. The expected rise in prices is pushing the population to buy goods. This creates an artificial shortage of some of them, and consequently, prices rise, which forces them to demand an increase in wages in advance (if there is a system of collective agreements). This kind of inflationary expectation is especially difficult to bring down.

Representatives of the main directions of modern economic theory differ in their assessment of the role of one or another cause generating inflation. Hence the differences in the proposed recipes for anti-inflationary policy.

Among theorists, primarily Western ones, the most common explanation for inflation is an excessive increase in the money supply. Proponents of this point of view - monetarists - proceed from the quantity theory of money. Here is its essence: any increase in the money supply that exceeds the growth rate of the gross national product inevitably gives rise to an increase in prices. What are the reasons for such inflation? In the expansionary monetary policy of the central bank and the growth of government spending. Hence the methods of anti-inflationary “treatment” proposed by monetarists: reduction of budget expenditures and strict monetary restrictions. The main task of the central bank, in their opinion, is to maintain stable prices and stability of the monetary system, allowing the growth of money supply only in accordance with GDP growth.

This, according to monetarists, is the main “rule” that the government must follow, regardless of the nature of the economic situation and the level of unemployment, which require an increase in government spending to revive the economy and stimulate production growth.

This group of theorists is joined by supporters of the so-called institutional theories, who believe that the main cause of inflation is excessive government spending - it is generated by the interests of certain groups of the population, political parties and the ruling bureaucracy. The main counteraction to inflation, in their opinion, is freedom of competition, free market relations and, above all, limiting the growth of state intervention in the economy, while the state bureaucracy is vitally interested in the opposite. Therefore, such a bureaucracy cannot be expected to truly control or limit this growth. Consequently, such restrictions must be introduced in the form of constitutionally enshrined rules that would protect the market system from the distorted influence of excessive redistributive activities of the state.

There is also the Keynesian theory of inflation, which is also associated with the pressure of monetary demand. However, according to this theory, not every increase in money demand causes inflation. On the contrary, an increase in the amount of money in circulation when there is underemployment, high unemployment and significant underutilization of production capacity in a country can, according to Keynes, stimulate production growth without affecting prices. True inflation appears when there is full employment of human and production resources. Then a further increase in money demand leads not to an increase in production, but to prices, that is, to inflation.

Other economists focus on the role of costs. They see the key element driving the inflationary spiral (costs - prices - costs) not so much in wages, but in the policy of trade unions, which, when concluding agreements with entrepreneurs, seek special clauses on a possible increase in wages if inflation rates increase - that is, about its indexing. But the fact is that large corporations easily translate rising wage costs into prices. Thus, the mechanism of continuous price increases is built into the modern economy of corporations and powerful trade unions.

Theoretical discussions about inflation and ways to combat it appeared in a developed market economy. To some extent, they can explain the nature of inflationary processes in our country. But, I repeat, only partially. In our economic system, in its sectoral structure, there are so many features, or rather, disproportions, without taking into account which it is impossible to explain such a multifaceted process as inflation.

It is not the task of the author of this article to show how inflationary processes developed there, “over the hill.” I will only say that the economies of Western countries, especially the United States, experienced the greatest “suffering” from inflation in the 80s of the last century, when fuel prices sharply increased during the oil crisis. In the United States at that time, much was written about double-digit inflation, reaching 14% per year. However, by the end of the 1980s, thanks to measures taken both in relation to costs and in relation to money supply, inflation dropped to 5-6%. In recent decades, both in the United States and in the countries of the European Union, the annual rate of price growth has remained at the level of 2-2.5%. Today, inflation manifests itself primarily in world markets - in the rapid rise in prices for basic resources (oil, gas and metals) and food products.

FEATURES OF INFLATION IN RUSSIA

Many people believe that in Soviet times, right up to the beginning of reforms in the 90s of the last century, prices rose (they were fixed for all goods), and therefore inflation did not exist in Russia at all. In fact, the inflationary process developed quietly and secretly. Inflation was subdued. According to some data, the annual rate of price growth in the 80s was 1.5%. Soon food products almost disappeared from store shelves. People of the older generation remember the “sausage excursions” to Moscow. In many cities, a kind of card system has appeared - coupons, food orders. Money meant little; there was almost nothing to buy with it.

The transition to economic reforms in the 90s - and they began with the liberalization of prices in an environment of general shortages and the collapse of production - made inflation open and truly “robbery”. The “money overhang” (that is, the gap between the mass of money thrown into circulation and the volume of commodity output), which had emerged under these conditions, collapsed. Inflation has reached catastrophic proportions. In 1992 alone, prices increased 26 times, and in the next year - another 10. Consumer prices in the first half of the 90s grew monthly by 15-18%.

The measures taken (primarily the sharp tightening of monetary policy) led to the fact that by 2000, inflation began to weaken. The annual increase in consumer prices in 2002 was 15.1%, in 2003 - 12%, in 2004 - 11.7%, in 2005 - 10.9%, in 2006 - 8.2% . In 2007 they planned to bring inflation to 6-7%, and in 2008 - to 4-5.5%. And suddenly the autumn of 2007 gave an unexpected outbreak of price increases, overturning all forecasts. The government was forced to take emergency administrative measures to freeze prices for socially important products - for six types of food.

In just one month, October 2007, consumer prices rose by 1.6%, and food prices by an average of 3.3% (this was more than three times the September price increase). Some food products managed to rise in price even before the price freeze: prices for sunflower oil increased from July to October by 60%, for butter, milk and dairy products - by 50%, for eggs - by 40%. The inflation rate for 2007 as a whole was, according to official data, 12% (one should not forget that the above figures are average figures). According to calculations by the Center for Macroeconomic Forecasting (CMAP), during 2007, goods in the “basket for the poor” increased in price by 15% (in 2006 - by 9%).

What caused such a sharp revival of the inflation trend? What is its nature - short-term or long-term? “Our” and “not our” experts argue a lot about this. Where to look for the root cause? Is it an excess of demand resulting from the excessive release of money into circulation, or an increase in costs? In my opinion, such a contrast is fundamentally false. For, as already noted, both reasons are interdependent, and no matter where we start, we will certainly end up with a vicious inflationary spiral.

Let's start with the main thing - with an increase in money in circulation. Such an increase occurred and is occurring for many reasons, including thanks to the serious social policy of the state aimed at increasing the incomes of the population, whose demand is beginning to grow. Many Russian economists see this as the main reason for the development of inflation in the country. Others take a more cautious position, not seeing a direct connection here. The second position seems more balanced. I will refer to one of these studies.

Indeed, its author notes, in Russia throughout the 90s of the twentieth century and in the new century, the growth rate of the money supply systematically exceeded the indicators planned by the central bank. The range of these excesses is from 20 to 50%. In total, during the period from 1999 to 2006, the money supply increased 13.4 times. “Here comes inflation,” a supporter of the first position will say. But it's not that simple. Firstly, along with the increase in the money supply, there was and is an increase in the demand for money itself, and savings increase. Evidence of this is the growth of household cash deposits in savings institutions, especially in Sberbank (this reduces the relationship between the increase in money supply and the consumer price growth index). Secondly, the speed of circulation of money slows down, and a large amount of money is required to service the same commodity turnover. And finally, the third factor that must be taken into account: the volume of money in circulation is important not in itself, but in comparison with the value of GDP - this ratio is called the monetization coefficient.

It must be said that with the beginning of the reforms, when inflation exceeded all imaginable levels and the government began to pursue a tough monetary policy, the monetization coefficient was reduced to the minimum imaginable size. Even at the beginning of 1999 it was only 16%. Then they talked and wrote a lot about the underfinancing of the economy, which became one of the reasons for the acute shortage of money among enterprises. Remember non-payment of salaries and pensions, the spread of barter exchange?

Figures for comparison: the monetization coefficient in developed countries ranges from 60-120%, and in countries with economies in transition it is 25-30%. To date, this figure has reached 26%. As we can see, nothing catastrophic has happened so far in the growth of money supply.

Catastrophic consequences could have occurred if the central bank and the government had not restrained the growth of the money supply entering the country from the sale of continually rising oil prices on foreign markets. Among the deterrent measures, first of all, we note the role of the Stabilization Fund. Its value today is almost 4 trillion rubles. For many years now there have been discussions on the topic: how long should this “bag” of money be increased and is it time to spend it in one way or another? Opponents of this type of spending have two main arguments. First. The main purpose of the fund is to create a “safety cushion” in case of a sharp drop in oil prices and a crisis situation in the country. The second argument is no less important: the danger of rampant inflation due to a sharp increase in the money supply. (The same role is played by the budget surplus, that is, the excess of government revenues over expenses - more than 7% of GDP.)

Recently, the arguments of those who believe that it is time to use part of the accumulated funds to develop important sectors of the economy, especially its infrastructure, have prevailed. It was decided to divide the Stabilization Fund into the Reserve Fund (in the amount of 10% of GDP) and the National Welfare Fund in February 2008. According to data announced by Finance Minister A. Kudrin, Vnesheconombank has already received 180 billion rubles for development purposes in 2007, the Russian Nanotechnology Corporation - 130 billion rubles, and the Housing and Communal Sector Reform Assistance Fund - 240 billion rubles.

But let’s return to the prices that seemingly so unexpectedly soared last fall. Investigating the reasons for rising prices in the country, many economists point to the high costs generated by the unreasonable degree of monopolization of industries supplying food to the consumer. In other words, we are reaping the results of extremely weak development of small and medium-sized production and complete inaction of cooperation. Here's an example: in one package of milk, only 5% is its cost; everything else is packaging, taxes and especially high trade markups that form the profitability of retail chains. In our country it reaches 25-30% (while in Europe a rule has been introduced according to which retail profitability should not exceed 8-12%).

Finally, we must point out the very high growth rates of prices for utilities and housing, transport, communications and gasoline - they significantly exceeded the average growth rate of consumer prices. For example, the cost of electricity in Russia as a whole increased by 15%, and for utilities by 18-20%. Gas prices are also rising: in 2008, wholesale gas prices for households and industrial consumers will increase by 25%.

INFLATION AND FOOD PROBLEM IN RUSSIA

The so-called unbalanced food problem plays an important role in the development of the inflation mechanism in our country. We are talking, first of all, about the shortage of food products. And it is the result of the previous weakness of our almost bankrupt agriculture, which was bankrupt not only as a result of the reforms of the 90s. They only revealed the complete non-competitiveness of its organizational forms - collective farms and state farms, which arose in the early 30s of the last century. It is no coincidence that during the transition crisis the decline in production in agriculture turned out to be much stronger than in industry. A huge gap has formed between supply and demand. Moreover, for some types of food it continues to increase. (For more information about this, see “Science and Life” No. 2, 2008, article by B. Rudenko “What will we be full of?”.)

This gap is filled by imports, which, unfortunately, tend to increase. Here are some figures: in recent years, the share of imports in the consumption of butter has reached 52.3%, fatty cheeses, including feta cheese - 42.1%, sugar - 67%, fish - 30%, vegetables, fruits, berries - 32% , meat and sausage products - 40%, raw meat - 80%. In general, 35% of the products included in the Russian diet are imported from abroad.

The meaning of imports is controversial. On the one hand, it replaces the missing food and thereby solves important socio-economic problems, but, on the other hand, it displaces domestic producers from the market. This often happens because imported products are cheaper than domestic ones. At the same time, we find ourselves captive to price movements that occur in world markets. For example, in recent years, food prices have begun to rise everywhere (according to some data, they have increased by 2.5 times). There was even a special term - “agflation”, that is, “agricultural inflation”.

What underlies the rise in prices for agricultural products? First: a decrease in stocks of grains and oilseeds in many countries of the world, especially in developing countries, due to worsening weather conditions - droughts, floods, etc. Second: a decrease in public reserves in major food exporting countries, combined with a gradual abandonment of policies export subsidies. (We are talking, first of all, about the EU countries.) Third: an increase in food imports from the rapidly growing countries of Southeast Asia (China, India, etc.). And finally, fourth: the accelerated formation of the biofuel industry, which is changing the relationship between the fuel and agricultural sectors in the world economy and affecting the prices of agricultural products.

Agflation had the greatest impact on grain crops, vegetable oil and dairy products. And the increase in import prices for these products, in turn, influenced the acceleration of our domestic inflation in the fall of 2007 (it is often called imported inflation). But it also happens: our government’s measures—quotas and restrictive duties aimed at curbing the import of certain types of products (primarily livestock, in order to create more favorable conditions for the development of domestic production)—actually push up prices. The rise in price of meat is always the result of such a policy. “Quotas on meat and poultry are our man-made inflation,” admitted Finance Minister A. Kudrin, explaining the surge in consumer price growth in 2003-2004. The Rossel-Khoznadzor ban on importing meat from Brazil and measures taken by Argentina to limit its exports led to meat prices jumping by 40% in 2006. There are many such facts that can be cited.

There is every reason to believe that the current inflation was not caused by the increase in money in circulation itself. It rather compensated for the rise in prices that resulted from increased costs. In other words, the same inflationary spiral is at work in which cost-push inflation and demand-side inflation interact, a spiral that is mediated by growing money circulation and which is especially difficult to stop.

WHAT TO DO?

Fighting inflation, as the experience of developed countries and our own shows, is extremely difficult. It would seem that what would be simpler: freeze prices or introduce some form of regulation of certain types of prices. Unfortunately, this method can only help for a short time. Freezing prices will soon result in increased shortages of certain goods and will further worsen inflation. We have already “been through this”, and we should not step on the same rake. Moreover, as many researchers note, a certain increase in prices for agricultural products is inevitable, since currently there is a serious disparity in prices for industrial and agricultural products, which fundamentally inhibits investment in agriculture.

The option of cutting social spending, the growth of which, according to some experts, is to blame for modern inflation, has been ruled out. These expenses are actually not as great as our anti-inflationists make them out to be. They only partially compensate for the miserable life of low-income groups in Russia. If you look at the share of social expenditures in GDP in Russia, then in comparison with developed countries they are very moderate (see table)

As we see, it is not social expenses that are to blame for the rise in prices in Russia. The reason for the current acceleration in price growth should still be sought in the area of ​​real factors that have already been mentioned. In support of this conclusion, I will cite the opinion of one very authoritative specialist on this issue. Speaking at the XVII Congress of the Association of Russian Banks in early 2007, the recent head of Sberbank of Russia A. Kazmin said: “Why are we fighting inflation only by limiting the money supply and thinking little about stimulating the supply of goods? With this approach, inflation will rise, despite measures to limit money demand... We may find ourselves in a situation where, thanks to the policy of limiting money demand, the production of goods not only for export, but also for the domestic market will become unprofitable. Accordingly, we will depend even more on imports, and competition in the domestic market will decrease.”

Agriculture deserves special attention from the state. The state in all developed countries, in one form or another, takes care of the agricultural producer. In Russia he found himself abandoned to the mercy of fate. To date, when most of the former farms - collective and state farms - have gone bankrupt, and the newly created farmers have barely survived in tough market conditions, we have developed a rather unique economic structure. The role of the private farming sector has increased sharply. It produces approximately 40% of domestic agricultural products. But this, in essence, is a subsistence economy that helps the population, especially in the provinces, to survive. Another 8% of production is produced by our heroic farmers. The remaining 50% of production comes in equal shares from surviving collective and state farms (25%) and the same amount from new agro-industrial holdings created with funds from large industrial enterprises.

And here the program adopted by the government for the development of the agrarian-industrial complex (AIC) seems especially important. The program includes three areas: accelerated development of livestock farming; stimulating the development of small businesses; providing affordable housing for young professionals (and their families) in rural areas. The project is aimed at increasing financial support for agriculture, and not through direct government investment (when there is a great threat of direct theft of money or its misuse or ineffective use), but based on purely market methods - expanding lending and subsidizing interest rates. Preference is given to the development of the strongest and most efficient farms that are able to quickly raise their technical level and increase the amount of marketable products.

It is expected that the program will stimulate the influx of private capital into agriculture, thanks to which a fairly solid sector of agro-industrial holdings has already been created, specializing mainly in the production of meat and dairy products.

There are many critical reviews of this program. And yet, the program is a very important contribution from the state to solving the food problem in the country, which, among other things, has an undoubted anti-inflationary orientation.

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To believe that inflation can be eliminated once and for all by putting some kind of “reasonable” government in power is a naive utopia. It can be reduced to a minimum, for example to 2-3%, which the governments of most developed countries have managed to do. But this requires hard work to limit all those objective and subjective factors that put pressure on prices, pushing them up.

Something else is also important. Even in conditions of declining rates of price growth, the need remains for periodic indexation of income, that is, increasing their nominal value in accordance with rising prices, especially in those areas of the economy where incomes are fixed and do not increase with production growth. We are talking, first of all, about state employees. The government has already recognized the reality of this kind of action, emphasizing in a number of official speeches that the next (in February 2008) increase in pensions and incomes of public sector employees is compensation for rising prices and nothing more.

The work was carried out with the financial support of the Russian State Science Foundation (Russian State Science Foundation) within the framework of project No. 06-02-02043a “Russian transition economy in the mirror of world economic thought.”

How does inflation affect the country's economy?

Moderate inflation of 2-4% per year has a positive effect on the economy. Most people, knowing that goods become a little more expensive every year, tend to spend their savings on purchasing goods. As a result, sales are growing and production is growing.

The values ​​of 2-4% per year were obtained historically. If inflation is more than 4% or less than 2%, then this already interferes with the development of the economy, or rather its stability.

During such periods, loan rates are not high and many people not only spend all their money, but even take out loans, thereby stimulating economic growth. Banks make money on loans, companies make more sales, and ordinary citizens work to pay off loans or earn money for new purchases. Everyone is happy: the population is actively working and consuming, the economy is growing.

In contrast, we can say that high inflation rates, on the contrary, have a negative impact. Few people will want to take out a loan even at 20%, not to mention higher rates of 30%, 40%, 50%. At the same time, wages, on the contrary, are declining at such a rate of depreciation of money.

Consequences of inflation

The consequences of inflation are manifested in both the economic and social spheres.

1. In conditions of inflation, real incomes of the population decrease. People with a fixed income receive a particularly strong “blow,” since the same amount can buy fewer and fewer goods every month.
2. Inflation leads to a decrease in real savings in the form of money, depreciating personal savings.
3. Inflation contributes to social stratification.
4. In conditions of inflation, a phenomenon such as a “flight” from money is often observed, which is an accelerated materialization of finance (money is quickly transferred into services and goods), which, in turn, stimulates production and contributes to economic development.

What causes high inflation?

Inflation affects all sectors in the country. If we are talking about high rates (more than 10%), then this leads to the following consequences:

• Fall in production (nobody buys anything, so there is no point in producing a lot);
• Decrease in enterprise income;
• Reduced salaries;
• Unemployment;
• Decrease in lending;
• High interest rates on loans;
• Social tension and falling birth rates;
• Increased crime;

During inflation, a redistribution of savings occurs in a country. As a rule, those who were rich become even richer. The poor lose their last savings and start all over again from scratch.

As 1976 Nobel Prize winner Milton Friedman said:

“Inflation is a form of taxation that does not require legislative approval.”

• How to become rich from scratch;

Inflation control

The country's financial regulator assumes an important responsibility to curb inflation. This is done by implementing measures through monetary policy, which refers to the actions of the central bank or other authorities that determine the size and growth rate of the money supply.

In Russia, the Central Bank of the Russian Federation is responsible for controlling inflation. The Central Bank of the Russian Federation sets inflation targets on a regular basis and, based on this, conducts its monetary policy by regulating interest rates. In the United States, the Federal Reserve's monetary policy objectives include moderate long-term interest rates, price stability, and maximum employment, all of which are intended to promote a stable financial environment. The Federal Reserve clearly communicates long-term inflation targets to maintain a stable long-term inflation rate that is considered beneficial to the economy.

Price stability—or a relatively constant rate of inflation—allows businesses to plan for the future because they know what to expect. The regulator believes that this will promote maximum employment, which is determined by non-monetary factors that vary over time and are therefore subject to change. For this reason, the regulator does not set a specific goal for maximum employment, and it is largely determined by the assessments of employers. Maximum employment does not mean zero unemployment because at any given time there is a certain level of instability as people leave their jobs and start new jobs.

Monetary authorities also take exceptional measures in extreme economic conditions. For example, after the 2008 financial crisis, the US Federal Reserve kept interest rates near zero and continued a bond-buying program called quantitative easing. Some critics of the program argued that it would cause a spike in US dollar inflation, but inflation peaked in 2007 and fell steadily over the next eight years. There are many complex reasons why QE did not lead to inflation or hyperinflation, although the simplest explanation is that the recession itself was a very marked deflationary environment and QE maintained its effects.

Consequently, US policymakers have tried to keep inflation at around 2% per year. The European Central Bank is also pursuing aggressive quantitative easing to combat deflation in the eurozone, and some countries have had negative interest rates due to concerns that deflation could take hold in the eurozone and lead to economic stagnation. Moreover, countries with higher growth rates can sustain higher inflation rates. Russia and India's target is about 4%, and Brazil's is 4.25%.

50% Hyperinflation occurs during periods when inflation is 50% or more per month.

How to save money from inflation

Money must "work" (be invested in something that increases it), otherwise it will depreciate. What to invest in during such periods? In the 21st century, there are more options for saving money during times of higher inflation than at any time in history. There is a whole range of financial instruments for investment that will allow you to survive an unfavorable period in the economy.

We list the best and most accessible methods for everyone.

7.1. Purchasing foreign currency

Buy dollars? It seems that this is the most convenient and easiest way to save money, but there are much more profitable ways. To buy currency, I recommend getting a brokerage account. It's free and doesn't require any cash outlay. For example, according to ratings, the best brokers in Russia are (I use them myself):

• Finam (promotion: Free Trade tariff, trading without commission forever)
• BCS Broker

These are the largest and most reliable brokers in Russia. They have excellent trading conditions, minimal commissions for turnover. There are no commissions for depositing or withdrawing money. Of course, there are other brokers, but they have much worse trading conditions and higher commissions.

Note You can top up your exchange account without leaving your home without commission. To do this, I recommend topping it up with an interbank transfer from a Tinkoff debit card. There are no commissions for this, and the transfer occurs within 4 hours. Read more about it in a special review of the Tinkoff debit card.

Now you can exchange currency at the exchange rate at any time in any place where there is Internet.

7.2. Buying cryptocurrency

Cryptocurrency burst into our lives very suddenly. The peak of popularity came at the end of 2022, when the Bitcoin rate exceeded $10 thousand, and literally a week later reached a maximum of $19.5 thousand.

Cryptocurrency is a universal way to save money because it is not tied to anything. Although there are fiat pairs BTC/USD, BTC/RUB (Bitcoin to the dollar and ruble), ETH/USD (Ethereum to the dollar), etc., the very essence of this is that this is a separate segment of the economy, which is influenced by completely different factors than for securities that are familiar to everyone.

There are opinions that during a new global crisis, cryptocurrency will greatly increase in price, as an alternative option for preserving its value.

Of course, this is a risky option, which will not only preserve, but possibly greatly increase your wealth. Read more about cryptocurrencies and how to buy them in the following articles:

• Top cryptocurrency exchanges in Russian;
• The best cryptocurrency exchangers for rubles;
• How to make money on cryptocurrency;
• What is mining for beginners;
• Trading on cryptocurrency exchanges;

7.3. Buying stocks and bonds

As a rule, company shares become much cheaper during periods of inflation, so you can buy them with the aim of making decent money in the future for 1-3 years. If you manage to buy them at the bottom of the market, then in this case you can earn a lot (100% -200% per annum). There is also the option of buying foreign shares, but this should be done before the national currency begins to depreciate.

To buy shares, we will need the same brokers as for currency. I recommend reading the following articles:

• How to buy shares as a private person;
• How to make money on the stock exchange;
• Trading on the stock exchange - where to start;
• What are Blue Chip Stocks?
• Bonds for beginners: what is it;
• How to buy bonds for an individual;
• Investments in shares;
• Investments in bonds;
• How to make money on the stock exchange;

Pros and cons of inflation

Inflation can be interpreted as a good thing or a bad thing, depending on which side you're on and how quickly the changes occur.

For example, people with tangible assets valued in currency, such as property or warehouse goods, may want to see some inflation because it will increase the price of their assets, which they can sell at a higher rate. However, buyers of such assets may be unhappy with inflation, since they will have to shell out more money. Inflation-indexed bonds are another popular option for investors to profit from inflation.

On the other hand, people who own assets denominated in currencies, such as cash or bonds, may also dislike inflation because it reduces the real value of their assets. Investors looking to protect their portfolios from inflation should consider inflation-hedged asset classes such as gold, commodities and real estate investment trusts (REITs).

Inflation encourages speculation, both from companies involved in risky projects and from individuals with company shares, as they expect higher returns than inflation. The optimal rate of inflation is often promoted to stimulate spending rather than saving to a certain extent. If the purchasing power of money falls over time, then there may be a greater incentive to spend now rather than saving and spending later. This could increase spending, which could stimulate economic activity in the country. It is believed that a balanced approach allows keeping the inflation value in the optimal and desirable range.

High and volatile inflation rates can impose significant costs on the economy. Companies, workers and consumers must consider the impact of general price increases when making buying, selling and planning decisions. This introduces an additional source of uncertainty into the economy because they may erroneously guess the level of future inflation. The time and resources spent researching, assessing, and adjusting economic behavior based on expected increases in the general price level rather than on actual economic fundamentals inevitably represents a cost to the economy as a whole.

Even a low, stable, and easily predictable rate of inflation that some consider otherwise optimal can cause serious problems in the economy because of how, where, and when new money enters the economy. Whenever new money and credit enter the economy, it is always in the hands of specific individuals or business firms, and the process of adjusting the price level according to the new money supply continues as they then spend the new money and it circulates from hand to hand and from accounts to accounts in economics.

Along the way, this first raises some prices, and then other prices. This consistent change in purchasing power and prices (known as the Cantillon effect) means that the process of inflation not only increases the general price level over time, but also distorts relative prices, wages, and profit rates along the way. Economists generally understand that deviations of relative prices from their economic equilibrium are harmful to the economy, and Austrian economists even believe that this process is the main driver of economic downturns.

What not to do during inflation

During inflation, the main thing is not to panic and try to spend money on goods that you do not need. The worst ways to save money during these periods are to purchase the following items:

• Auto;
• Household appliances;
• Jewelry;
• Real estate. Although if you take it much cheaper and then rent it out, then perhaps this would be a good option;
• Currencies in exchange offices on the street (the rates there are initially very high);

All these purchases will not save money, but on the contrary, you will spend your last savings on things that were not needed. I perfectly understand and share the joy of purchasing a new car or apartment, but first decide how much you need it. After all, these funds could have been invested in some securities that had actually fallen in price, and in just six months, perhaps this amount would have doubled.

• Investing in securities is a simple matter of complexity;
• Stock buying strategies;
• Investment strategies on the stock exchange;
• Investments through ETF funds;

Causes of inflation

It is difficult to say with certainty when humanity first encountered the problem of inflation. Inflation is directly related to money and money circulation, therefore the emergence of inflation is associated with a fairly high stage of development of market relations, when regular economic relations for the exchange of goods required the allocation of a huge mass of their universal equivalent.

Many ancient rulers tried, more or less successfully, to find a solution to the eternal problem of balancing budget revenues with ever-increasing expenses. There are several ways to solve this problem:

• limit government spending;
• increases in taxes, duties and tariffs;
• borrow money at home or abroad.

But self-restraint is contrary to human nature. There are objective limits to increasing fiscal pressure. And debts must be repaid. Then ancient economic thought discovered a fourth way to balance the national budget:

• Issue of additional amounts of money into circulation.

In ancient times, the function of money was performed by ingots of precious metals. The minting of coins from precious metals, and later from copper and iron, became the main state monopoly. However, this would not bring any revenue to the state if the contents of the coin fully corresponded to its face value. But it is necessary to reduce the content of precious metals, maintain the previous denomination, and the government received a new source of budget replenishment. Due to the so-called “coin flop,” the nominal money supply exceeds its real value, which leads to inflation.

Inflation was characteristic of monetary circulation: in Russia - from 1769 to 1895 (with the exception of 1843 - 1853), in the USA - during the War of Independence (1775 - 1783) and the Civil War (1861 - 1865). ). Inflation reached particularly high rates in Germany after the First World War, when in the fall of 1923 the amount of money in circulation reached 496 quadrillion marks, devaluing the monetary unit trillions of times.

From the above it is clear that the development of inflationary processes was stimulated mainly by purely monetary factors, and not by changes in the cost of goods. Inflationary processes caused by the need for redistribution in favor of the state or certain sectors of the economy took place even before the introduction of paper money, but the scale of inflationary redistribution was more modest.

What are the inflation indicators?

Inflation is measured using various indices. The most popular is the Consumer Price Index (CPI). This is an important indicator in the economy, so after its publication on the stock exchange, volatility increases sharply. There are also other indicators:

• Cost-of-living Index (COLI);
• Asset price index (shares, real estate, debt capital prices, etc.);
• GDP Deflator;
• Paasche index;
• Producer Price Index (PPI). Cost of production.

Note For the average person, inflation can be observed when the national currency begins to fall in price compared to world “hard” currencies (dollar, euro, franc, yen, etc.). As a rule, a cheap national currency quickly fuels inflationary processes.

Extreme values ​​of inflation using real examples

Since all world currencies are paper (fiat) money, the money supply can increase rapidly for political reasons, causing the price level to rise rapidly. The most famous example is the hyperinflation that plagued Germany's Weimar Republic in the early 1920s. The victorious countries of World War I demanded reparations from Germany, which could not be paid in German fiat currency because they were of suspicious value due to government borrowing. Germany tried to print paper notes, buy foreign currency with them, and use it to pay off its debts.

This policy led to the rapid devaluation of the German mark, and the development was accompanied by hyperinflation. German consumers responded to the cycle by trying to spend their money as quickly as possible, realizing that the longer they waited, the less it would be worth. More and more money poured into the economy, and its value plummeted to the point where people would paper their walls with virtually worthless bills. Similar situations occurred in Peru in 1990 and Zimbabwe in 2007–2008. We should not forget our experience, when after the collapse of the USSR, inflation in many former republics took on extreme values. In Russia, the annual inflation rate reached 2000% or more in 1992-1993.

How to fight inflation

In the modern world, the main regulator of inflation is the Central Bank. They have several levers for this:

1. Increase in the key interest rate of the Central Bank. If it is high, then money becomes more expensive;
2. Reducing the money supply;
3. Sale of securities. As investors buy government bonds, the amount of money in the economy decreases;

For example, let’s remember the end of 2014. The ruble sank by 5-10% against world currencies every day. The Central Bank took drastic measures: it sharply increased the key rate from 11.5% to 18%. This made it possible to stop the depreciation of the ruble, but at the same time actually froze the economy of our country for several years. After all, loans have become extremely expensive and this is at an unfavorable time due to the recession in the economy.

In general, inflation cannot be stopped instantly. This is a rather lengthy process.

Commodity inflation

In most countries of the world, commodity inflation is the most important macroeconomic indicator that determines investment and consumer demand, interest rates, exchange rates, and many social aspects, including the quality and cost of living.

The state’s ability to keep inflation at an optimal level allows us to speak about the efficiency of the economy in the country, about a fairly high degree of development of self-regulation mechanisms, about the dynamism and stability of the economic system. Inflation at an optimal level (up to 10% per year) is useful for the country’s economy, as it stimulates commodity-money relations, the production of various goods, and so on.