Many countries in our time suffer from the problem of inflation, but what is the concept of inflation? What are its types? And what are its negative effects? What are the ways to combat it? All of this we will present to you, dear readers, in this article. So follow us in the next few lines.
What is the concept of inflation?
Inflation is defined as an economic term that refers to the rise in the general level of prices of goods and services. Which results in a decrease in the purchasing power of the country’s currency; Where the value of money decreases in the ability to purchase whenever the prices of goods rise, and it can also be said that inflation is the deterioration of the value of money when the prices of goods and services rise as a result of the increase in the amount of money relative to the number of goods and services.
There were many definitions of inflation, most notably the definition of the famous economist “Keynes”: “It is that which leads to a rise in production costs and prices without being accompanied by an increase in the volume of production.” President “Reagan” described inflation as: “Inflation is violent like a criminal, and frightening.” Like an armed robber, and as deadly as a murderer.”
According to Hanson, inflation is defined as: “Inflation occurs when the volume of purchasing power is constantly ahead of the production of goods and services so that there is a continuous tendency to rise in the prices of both goods and factors of production due to the supply of goods and services, and the failure of the FPO to keep up with the demand for them.”.
According to “Silverman,” the definition of inflation came as follows: “Inflation is the name given to the expansion of the money supply, whether in currency or credit, beyond the amount justified by the government for trade.”
John Maynard Keynes defined inflation as follows: “Inflation is the result of excess aggregate demand over aggregate available supply, and real inflation only begins after full employment.”
What are the types of inflation?
The types of inflation are as follows:
1. Types of inflation at the time of its occurrence:
- Inflation in Peacetime: It means the rise in prices in times of peace when the country does not suffer from any wars; It occurs because of either spending on capital projects for a long period, or because of huge government spending.
- Inflation in wartime: It occurs as a result of the government giving priority to the production of military equipment and goods, and diverting all productive resources to achieve this; Which results in a shortage of raw materials needed for the production of basic commodities, and then slows down their production and supply and to meet the increasing demand for them by the population; This leads to a continued rise in the prices of these basic commodities in the market. Which leads to inflation during the war period.
- Post-war inflation: This inflation occurs shortly after the end of the war. It is the result of easing government controls; Which leads to an increasing and accelerating price hike much more than during the war period.
2. Types of Inflation based on Price Increase or Inflation Rate:
These include the following types:
- running inflation: Running inflation occurs when prices rise by 10-20% annually.
- Accelerated inflation: Accelerated inflation occurs when prices rise between 20% and 1000% annually.
- Hyperinflation occurs when prices rise by more than 1,000% annually.
- creeping inflation occurs when prices rise slightly; That is, the rate of increase does not exceed 3% annually.
- Chronic inflation: The reason why this type of inflation is called chronic is that if the inflation rate continues to grow for a long period without any decline, excessive inflation may result. It is worth mentioning here that there are two types of chronic inflation:
- Chronic intermittent inflation: which happens at regular intervals.
- Persistent chronic inflation: This remains stable without any indication of its decline.
- mobile inflation: Mobile inflation occurs when prices rise by between 3% and 10% annually, and it is worth noting here that mobile inflation is a warning sign of the occurrence of running inflation.
- Moderate inflation: Moderate inflation occurs when prices rise by less than 10% annually. It is worth noting here that moderate inflation is not considered a serious economic problem.
3. Types of Inflation based on Coverage and Scope Point of View:
These types include the following:
- Overall inflation: Also called broadband inflation, this type of inflation occurs when the prices of all kinds of commodities rise across the country.
- intermittent inflation: This type of inflation occurs when the prices of some commodities increase in only limited areas of the country.
4. Types of inflation depending on the different causes:
It includes many types, including:
- Credit inflation: This type of inflation occurs as a result of excessive bank credit in the economy.
- Earnings inflation: It occurs when prices rise as a result of the interest of traders and businessmen to increase their profit margins.
- tax inflation: This type of inflation occurs when sellers force an increase in the price of goods on consumers; as a result of higher indirect taxes.
- development inflation: In this type of inflation, there is an increase in demand for goods and an increase in prices. This is due to the increase in income of individuals during the process of economic development.
- Wage inflation: In this type of inflation, prices rise; As a result of the mismatch between the increase in wages and the rate of increase in production.
- Population inflation: It occurs when the prices of goods and services increase due to the rapid increase in the population.
- Deficit hypertrophy: It occurs as a result of deficit financing.
- Scarcity inflation: This type of inflation occurs due to hoarding by some merchants, in which an artificial shortage of basic commodities is created, and then sold at higher prices to achieve huge profits during the inflation of scarcity. It is worth mentioning here that hoarding is a criminal offense punishable by law.
- Inflated pricing power: Also called “oligopoly inflation” or “managed price inflation”, this type of inflation occurs when manufacturers increase the prices of goods and services provided to increase profit margins.
- Inflation occurs as a result of spending when there is a budget deficit or because of an increase in government spending.
- Inflation resulting from foreign trade: This type of inflation is divided into two main parts:
- High import prices: The rise in the prices of imported commodities due to external inflation leads to a rise in the prices of domestic products compared to imported commodities.
- Export boom inflation: In which commodity prices rise due to the significant increase in exports; This leads to a shortage of these commodities in the domestic market of the exporting country.
- Sector inflation: This type of inflation occurs when the prices of services and goods produced by a particular sector of industries rise.
- cost-push inflation: This type of inflation results from wage inflation, material cost inflation, or profit inflation. It is worth noting that all these excess costs are charged to the consumer through an increase in commodity prices, and are not borne by producers.
Ways to combat inflation:
There are several government policies aimed at reducing inflation and limiting its negative effects. Among the most important of these policies, we mention to you:
1. Increasing the number of banks’ reserves:
In this procedure, governments and countries set a minimum level of bank reserves to cover withdrawals; That is, banks will refrain from increasing lending rates to preserve the amount of money withdrawn; This will result in the inability of citizens to spend at the same level they used to. This is due to the fear that the banks do not have a reserve of money to borrow and withdraw money.
2. Adopting a fiscal contraction policy:
This is done through several steps:
- Raising interest rates in the central bank.
- reduce bond prices.
- Reducing cash trading in the markets.
This results in a reduction in spending money, and the tendency towards saving to reduce the need to take loans with high-interest rates, and then the sales movement in the markets will decrease. Which leads to lower prices, and reduces the problem of inflation.
3. Reducing Money Supply:
This method can be followed directly or indirectly. As the government can claim its debts owed from companies and individuals with increased interest on bonds; Which affects the price of the currency and its purchasing power, and then the money circulating in the hands of investors will come under the control of the government. As a result, the state will become the first controller of its fate.
What are the negative effects of inflation?
Among the most important negative effects of inflation, we mention the following:
- Impact on the debtor and creditor of fixed cash amounts.
- Economic vulnerability.
- Poor economic development and comprehensive development.
- Find alternative ways to save.
- Damaging corporate revenues.
- Decreased purchasing power.
Thus, dear readers, we have presented to you the concept of inflation, its types, methods of combating it, and its most important negative effects.