Inflation refers to rising prices for goods and services. Rising prices for goods and services can also be viewed as a weakening in the value of the currency. Inflation can thus be defined as a process of increase in costs and decrease in purchasing power. The opposite of inflation is deflation. The generally negative effects of extreme inflation make inflation one of the most recognizable concepts in economics.
Inflation has several types, which are categorized with reference to the causes of the phenomenon of inflation. The causes of inflation have been analyzed from numerous perspectives. The analytical perspectives are taken to explain inflation also help to understand its effects. Some of the types of inflation include demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation results from an increase in demand. Cost-push inflation results from a decrease in supply Built-in inflation results from the anticipation of future inflation in the market.
What is Inflation?
Inflation may be defined as a persistent increase in costs for goods and services. The persistent increase in costs for goods and services that is inflation may also be viewed as a process of depreciation in the value of a given currency. Attempts to normalize inflation have been made. The attempts to normalize inflation cannot disguise the fact that high rates of inflation have extremely deleterious effects upon the fabric of society, however. The extremely deleterious effects that high rates of inflation have upon society have played an important part in numerous historical tragedies. One of the historical tragedies brought about by high rates of inflation was the rise of the National Socialist Workers’ Party in Germany during the 1920s and 1930s and the subsequent outbreak of the Second World War.
When does Inflation Occur?
Inflation results from an imbalance in the basic economic principle of supply and demand. Supply and demand are in constant flux. Demand and supply change based on myriad factors, and supply tends to rise to meet increased demand. Increased demand or decreased supply results in competition between consumers for scarce products. The competition between consumers for scarce products drives up prices. Supply rises to meet increased demand. The rise of supply to meet increased demand causes prices to rebalance, in theory. Inflation has been persistent over the long term, however, with prices following an upward trend over the past few centuries.
What is a Good Inflation Rate?
Attempts have been made to normalize inflation. The attempts that have been made to normalize inflation focus their analysis on the fact that inflation can also be described as a weakening in the value of the currency. The weakening value of currency means that debts contracted at an earlier period tend to become less onerous over time. The fact that debts become less onerous over time in an inflationary regime incentivizes economic actors to take on more debt. The debt that economic actors are incentivized to take on is used to grow the economy, benefiting all the members of society, in theory. The normalization of inflation has coincided with the financialization and deindustrialization of the American economy. The benefits of a consciously debt-based economy have tended to flow to a small group of very wealthy individuals in much greater proportion than to other economic classes. The deindustrialization of the American economy has weakened supply chains, leading to much higher rates of inflation than are supposedly beneficial.
What is a Bad Inflation Rate?
High rates of inflation are bad. Attempts to normalize inflation posit that a small, constant rate of inflation is beneficial. No attempt has been made to normalize high rates of inflation. Inflation may be considered to be a competition quotient. Individuals compete over a smaller amount of available goods in an inflationary environment. The competition over a smaller amount of available goods results in winners and losers. The winners are able to afford the goods and services that they want, but the losers are not able to afford the goods and services they want. The higher the rate of inflation is, the greater the division of society into winners and losers. The greater the division of society into winners and losers is, the greater the likelihood that economic competition will lead to political and even martial competition, such as civil war. Inflation also results in winners and losers among countries, with the result that international war becomes more likely in an inflationary environment.
What are the Commonly-Used Inflation Indexes?
Economic bureaucrats and authorities use several different indices to measure inflation. The basic acronym used for most of these indices is “CPI”, which stands for “consumer price index”. Various modes of CPI are used to track how much people pay for the goods that they buy. The “non-core CPI” is the broadest mode of CPI. The “core CPI” excludes goods whose prices tend to fluctuate, such as gasoline and food. The producer price index (PPI) is another measure of inflation. The PPI measures the amount that producers pay for their goods. The “GDP Deflator” is another measure of inflation. The GDP Deflator measures the prices of all USA products for the purpose of measuring the size of the USA economy excluding inflation.
What are the Types of Inflation?
The following table presents the types of inflation.
|Driven by demand
|Driven by supply
|Driven by anticipation of inflation
|Higher demand leads to higher prices
|Lower supply leads to higher prices
|The expectation of inflation leads to higher prices and wages
|Moderated by increased supply
|Moderated by decreased demand
|Moderated by financial policy action
How is Inflation Calculated?
Listed below is the way to calculate inflation.
- Inflation is calculated by documenting the prices individuals pay for products over time. The documented prices that individuals pay for products over time change.
- The rate of change in the documented prices that individuals pay for products is called “inflation” or “deflation”.
- “Inflation” refers to increased prices that individuals pay for products over time. “Deflation” refers to decreased prices that individuals pay for products over time.
- The documented prices that individuals pay for products over time can be divided into several categories, as reflected by the various indices used to measure inflation, such as the consumer price index and the producer price index.
What are the Pros of Inflation?
The following table presents the pros of inflation.
|Pros of Inflation
|The rich get richer
|Incentivization to take on copious quantities of debt
|“A rising tide carries all boats”
What are the Cons of Inflation?
The following table presents the cons of inflation.
|Cons of Inflation
|The poor get poorer
|Financialization of the economy
|Social division, civil war, global conflagration
What are the Causes of Inflation?
The following is a list of the causes of inflation.
- Increased demand. Supply comes to be limited in relation to demand when demand increases. Competition over scarce resources drives prices higher.
- Decreased supply. Demand comes to expand in relation to supply when supply decreases. Competition over scarce resources drives prices higher.
- Inflation expectations. Expectations of inflation change behavior when inflation carries on for a long period of time. Producers increase wages and prices in anticipation of inflationary forces.
What are the Effects of Inflation?
The following is a list of the effects of inflation.
- Reduction in the debt burden. The debts taken on at earlier periods have their value reduced in real terms.
- Competition over scarce resources. The mismatch between supply and demand causes sharpened social division.
- Social and political strife. The competition over scarce resources results in winners and losers. The losers in the competition over scarce resources take the competition outside the economic arena and onto the field of battle.
What Effect does Inflation have on Businesses?
Inflation has various effects on businesses. The effects of inflation on businesses can be positive and negative. A positive effect of inflation on businesses is that the value of debt is reduced over time. A negative effect of inflation on businesses is that businesses need to pay higher prices for goods and labor. Another negative effect of inflation on businesses is that society may be impoverished, leading to unstable political and social realities.
When does an Inflation Crisis Occur?
An inflation crisis occurs when high rates of inflation lead to economic winners and losers. Demand comes to be unbalanced relative to supply over a long period of time. Competition over scarce resources leads to economic winners and losers. The divide between economic winners and losers becomes a social divide. Economic losers turn to other means of gaining economic resources and social status. Other means for economic losers to gain economic resources and social status include crime, riots, democracy, and civil war. Crime, riots, democracy, and civil war lead to extreme violence and the redistribution of wealth by force.
How can I Profit from Inflation?
The following are ways to profit from inflation.
- The easiest way to profit from inflation is to take on a great deal of debt. The debt you take on will be reduced in value over time.
- Another way to profit from inflation is to engage in currency speculation.
- You can also buy inflation-resistant products and commodities that represent stores of value, especially when your currency is losing value rapidly.
- Investing in weapons manufacturers and security services is a great way to profit from the social decay caused by inflation.
What is Inflation Accounting?
Inflation accounting refers to accounting techniques that show or negate the effect of inflation on assets. Inflation accounting allows for the value of companies to be estimated on a consistent basis. Inflation accounting measures the financial statements of companies relative to price indices like the CPI. Inflation accounting is especially important during periods of hyperinflation. The value of companies can be misleading when expressed solely with reference to currency during periods of hyperinflation. Inflation accounting gives a truer picture of the value of companies during periods of hyperinflation.
Is it Possible to Profit from Inflation?
Yes, it is possible to profit from inflation. The suffering of others can be your golden opportunity to live the life of luxury you deserve. The social decay caused by inflation leads to criminality. Criminality threatens the private property. People who own private property will defend their property using weapons, leading to higher gun sales. Investing in weapons manufacturers is thus an excellent idea during periods of hyperinflation, to give only one example.