27. Inflation and its effects on financial markets
The current situation of market prices makes most of us come across the concept of inflation. Today, that’s what we’re tackling. What is inflation, and how does it distort the functioning of the market? What does this one mean indicator?
Inflation – definition
Inflation, it’s nothing more than a price increase in goods and services. In real terms, we buy less than, for example, in the previous year. From an economic perspective, it is then inflation, that is, a decrease in purchasing power of money. What does this force actually mean? It is the ability of money to purchase the above-mentioned goods and services. During inflation for the same amount of money, we buy fewer things in the store, and we notice price increases in the store.
We wrote about money and its most important features here. It is worth recalling the most significant issues before moving on to the next paragraphs of today’s lesson.
It is then said that “something” took money from our wallet. Eventually, the amount we have decreases, on top of inflation, i.e. the increase in the price of goods and services. Then we encounter an increase in the money supply and the accumulation of one’s wealth in other tangible and material values.
It is worth noting that in the process of inflation, only one price does not suddenly rise. During this period, there is often discussed the phenomenon of continuous price growth and to average them, it is created by price indices. We are talking about a set of goods and services that are the most popular among consumers at a given moment and their prices are compared, for example, with the previous year.
Types of inflation
- Demand inflation (monetary) – the reason for the increase in prices on the market is definitely greater demand in relation to supply. She is also called monetary inflation because there is an excessive amount of money in circulation during this period.
- Cost inflation – the price of goods and services increases because the cost of production of the goods increases.
- Structural inflation – the production structure does not change in relation to the new needs of buyers.
- Creeping – occurs when the price increase does not exceed a few percent per year. It is minimally invasive and does not cause changes in economic processes. Creeping inflation can be controlled.
- Walking – prices increase by several percent, which causes a stir in the economic market.
- Galloping – we deal with it when the price increase on the market is already a two-digit number. Social and economic tensions arise (strikes). The economy is not growing and developing. An example may be double-digit inflation in our country and in the world.
- Hyperinflation – everything happens in the blink of an eye. Money loses its value rapidly, prices increase day by day. This is generally due to ill-considered budgeting of state expenditures by the government.
Causes of inflation
Among the most popular are certainly:
- Too much money in the economy.
- Lowering interest rates.
- Quantitative easing.
- State’s financial troubles.
- The government has to pay a budget deficit.
- Increase in employees’ salaries.
- Increase in prices of energy resources.
- High taxes.
- Monopoly in the economy.
They are definitely deplorable. Inflation is never good for the state and its citizens:
- Decrease in the value of money.
- Decrease in the value of savings.
- Economic activity is unstable.
- Lack of motivation among society to change.
- Higher nominal income.
- Due to the high prices of energy resources, production is limited.
- Difficulties in foreign trade.
How does the Central Statistical Office calculate the level of inflation?
To measure inflation, the Central Statistical Office uses the price levels of goods and services in two comparable periods. Additionally, it uses information on the structure of household expenditures. The data it collects from the Central Statistical Office that’s over 200,000 prices per month. The whole country is being investigated.