What is inflation?
What is inflation?
Inflation (Latin: Inflatio) - a macroeconomic indicator of the economy of the country, which characterizes the change in the general level of prices for goods, leading to a depreciation of money. Actual inflation in the country at 10% suggests that you can buy 10% less goods for the ruble you earn, that is, inflation is a decrease in the purchasing power of money.
What is the essence of inflation?
The essence of inflation is that it is inherent exclusively in paper-money circulation, which means overfilling the sphere of circulation excessive in comparison with the needs of turnover mass of paper money, their depreciation and as a result, higher prices for goods and services, the decline in the purchasing power of money. Inflation is caused primarily by overfilling the channels of monetary circulation with excess mass of money in the absence of an adequate increase in the stock of goods.
Why does inflation occur?
Inflation can arise from internal and external causes.
The internal causes of inflation:
- violation of the proportions of reproduction: between production and consumption, accumulation and consumption, supply and demand, the mass of money in circulation and the sum of commodity prices;
- Significant growth of the state budget deficit and public debt due to unproductive government spending;
- excessive issue of money, violating the laws of money circulation;
- The militarization of the economy, which diverts a significant portion of resources to the defense industry, is a heavy burden on the state budget, increasing its deficit and generating its (deficit) inflationary financing;
- an increase in the tax burden on commodity producers;
- outstripping the growth rate of wages compared to the growth rate of labor productivity.
External causes of inflation:
Mainly related to the increasing internationalization of economic ties between states, which are accompanied by increased competition in the world capital markets, commodity markets, labor markets, the aggravation of international monetary relations, with the structural world crises (energy, food, financial, etc.).
What types of inflation are there?
There are several types of inflation in a market economy:
- Moderate inflation - prices are rising at 3-4% per year, which is considered a normal rate;
- Crawling inflation - prices are rising at a rate of 8-10% per year, indicating a growing destabilization phenomenon in the economy;
- Galloping inflation - price increases are steep, spiking up to 50% per year;
- Hyperinflation - price increases of 50-100% per year.
The last two types of inflation are dangerous for the economy: their insidiousness lies in the uncontrolled process of price increases, which leads to a significant economic downturn.
Why is the inflation rate important to a trader?
For stock trading It is very important to keep track of the inflation rate of the country whose currency you are trading in, because the country's monetary policy depends on the rate of consumer price growth.