Introduction
Inflation is one of the economic phenomena that has attracted significant attention recently, particularly with its exacerbation as a result of rising global demand, which has been sapped by household savings, supported by government subsidies provided after the end of the COVID-19 pandemic.
The pandemic had paralyzed the global economy and plunged it into a severe recession due to the lockdown policies implemented by countries to limit the spread of the virus, which led to disruptions in supply chains.
However, the global economic recovery was hampered by the Ukrainian-Russian war and the problems it caused in food supply and a shortage in the supply of energy to the market, which led to an increase in its prices.
This increase was reflected in the rest of the goods and commodities, causing inflation to reach unprecedented rates that had a negative impact on the economic and social situation of countries, such as a decline in economic growth, an increase in unemployment, and a deterioration in the purchasing power of citizens, which created a state of social congestion that threatened the social peace of countries.
What inflation meaning
Inflation is a sustained and significant rise in the general level of prices over a specific period of time. With a decrease in purchasing power. The average prices of goods and services consumed in the economy during a given year, calculated using a standardized index called the general price index. Talking about inflation requires examining three key elements :
- Increase in the general price level
- The rise continues in time.
- Demand is greater than supply
Accordingly, the rise in the price of some goods but not others is not considered inflation because in this case, any increase in the price of some goods is offset by a decrease in the price of other goods, making the overall price level stable.
Therefore, inflation refers to an increase in the prices of most goods and services, particularly basic commodities, which constitute a significant portion of the consumer’s budget.
Also, a temporary rise in prices is not considered inflation because it is not continuous over time.
Types of inflation
1- Inflation Open
It is the overt or apparent inflation, and this rise in prices occurs in response to increased demand, meaning that prices rise to achieve balance between supply and demand without the state intervening in this process.
2- Suppressed inflation
It is the restricted or latent inflation, which is the inflation under which prices cannot expand or rise due to the presence of direct restrictions placed to control price increases through pricing or forced ceilings. Prices rise as soon as the restrictions are lifted.
This type of inflation results in :
- Decrease in product quality with constant price ;
- Administrative price fixing may lead to the emergence of a black market.
3- Hyperinflation
It is the large increase and sharp rise in prices followed by a similar increase in wages, which in turn leads to an increase in production costs. This results in a decrease in the investor’s profits, so he in turn increases prices to maintain his profit margin.
This increase in prices leads to demands to raise wages, which puts the economy in what is called the vicious cycle of inflation.It should be noted that this type of inflation is characterized by very strong inflation that occurs over a short period of time, which may result in a sharp decline in the currency and even its collapse.
4- Rapid inflation
It is a rapid rise in the general level of prices over a medium period of time, leading to a deterioration in the value of the currency.
5- Moderate inflation
It is an increase in the general level of prices at a constant rate over time that may lead to a decrease in the value of the currency in the future.
6- Creeping inflation
It is less dangerous to the national economy than hyperinflation because it is slow and gradual, and occurs over a long period of time. This type of inflation causes a decline in the value of the currency over a long period.
Causes of inflation
1- Economic growth
It is an important incentive for the emergence of inflation, as increased economic growth raises labor employment rates and thus increases the wage bill, which stimulates domestic demand, resulting in a rise in prices.
2- Inflation forecast
The psychological factor of anticipating inflation leads to an increase in current demand to avoid future price increases. This increase in demand leads to higher inflation rates.
3- Natural disasters and monopoly
These two factors lead to a reduction in the supply of goods and services and their insufficiency in meeting demand, resulting in an increase in prices according to the principle of the law of supply and demand.
4- Aggregate supply shortage
The rise in costs, primarily represented by increased wages and the increase in the prices of production requirements, leads to an increase in expenditures and thus a decrease in aggregate supply.
This situation is characterized by the occurrence of inflation and unemployment simultaneously in a phenomenon known as stagflation or inflation depression.
It should be noted that stagflation is a rare and abnormal phenomenon in the economic situation, given that the relationship between inflation and unemployment is an inverse relationship, meaning that : when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly, as shown below in the Phillips Curve :
5- Restructuring the economy
Inflation may be linked to the nature of the structure of the production apparatus and the structure of the existing economic system. The structural aspects of the economy vary and take various forms. For example, we find :
- The low elasticity of the productive apparatus represented by the inability of the supply structure to change to match the demand structure ;
- Poor productivity ;
- The dominance of the rentier economy ;
- Lack of competition ;
- The economy is at the beginning of the development process, by focusing on infrastructure.
Sources of inflation
1- Cost-push inflation
It is the inflation that occurs when the prices of consumer and industrial goods continue to rise as a result of increased production costs resulting from the rise in the costs of production factors in economic institutions.
2- Demand-pull inflation
It occurs when prices rise as a result of an excess of aggregate demand over aggregate supply, whether in the goods market or the factors of production. When full employment is reached, the increase in demand and spending leads to an increase in prices to meet the excess of society’s productive capacity.
3- Inflation caused by the economic blockade
As a result of the blockade that a country may be subjected to for one reason or another, which prevents it from being able to import goods and merchandise from abroad, this will cause a shortage of products and consequently a rise in prices and the occurrence of inflation.
4- Inflation caused by monetary issuance
It arises as a result of an imbalance between the amount of money in circulation and the volume of goods and services offered. A large increase in the money supply compared to the volume of goods and services available in the national economy leads to an increase in prices and the occurrence of inflation.
5- Inflation source
The rise in prices is caused by an increase in the central bank’s dollar reserves, resulting from the existence of what is known as the dollar payment rule.
6- Borrowing-induced inflation
In an attempt to pay off its debts, the government may be forced to print more money without increasing production, which increases the money supply and generates inflation.
The government’s resort to raising taxes to increase its revenues may push companies to raise their prices to compensate for the tax rate imposed on them, thus causing inflation.
7- Inflation resulting from the entry of money from unknown sources and through illegal means
Money laundering and the resulting purchasing power for its owners, who are an unproductive group, puts pressure on the supply of goods by increasing consumption rates. This increased demand leads to higher prices.
8- Imported inflation
It occurs when prices rise as a result of the flow of global inflation into the country through imports. That is, if a country suffers from inflation, imports from this country will inevitably transfer this inflation to the local economy through imported goods and services.
This transfer is not total, but rather according to the volume of imports, which is expressed by the following equation :
This equation expresses that the Imported Inflation Rate increases with the increase in the volume of imports.
Conclusion
The views of economic experts have varied greatly in their dealing with the phenomenon of economic inflation, in terms of explanation and analysis, as well as ways to treat it, and attributed to the difference is due to the multiplicity of their orientations and the economic schools whose proposals they adopt.
For example, we find the quantity theory of money, it stipulates that the increase in the amount of money circulating in the market is the reason for the emergence of signs of inflation.
At the time you see Keynesian theory Inflation is an increase in purchasing power that is not matched by an increase in production, or an increase in real demand in an environment where all means of production are fully utilized. Then there is the contemporary quantity theory of money, whose proponents are called monetarists.
Milton Friedman is considered one of the fathers of this school, which holds that inflation is a purely monetary phenomenon, and its primary source is the growth of the money supply faster than production.