If prices are constantly rising, we can talk about an economical situation that implies inflation.
Inflation is a steady increase in the general level of prices for goods and services. At the same time, certain goods may be noticeably cheaper, while others may not change at all in price.
Basically, some prices are regulated by the state and some are not. For example, if the farmers had a good harvest of vegetables, local potatoes will be cheaper. If the state increases taxes on alcohol, the prices on alcohol will increase.
How is inflation measured?
The consumer basket is a set of products, goods and services that the average person or family regularly buys. It includes about 500 goods and services - for example, products, clothing, utilities, household appliances, cars.
People often buy bread, vegetables, meat or gasoline. Thus, when buying a consumer basket, a car occupies a larger share than bread. The cost of this conditional basket varies from month to month. This change is inflation.
What are the types of inflation?
- Low - up to 6% per year. Such inflation is comfortable for both consumers and entrepreneurs. And at the same time, it allows the economy to grow.
- Moderate - from 6 to 10% per year. It can get out of hand.
- High (galloping) - from 10 to 100% per year. It creates market instability; people and companies cannot plan their future.
- Hyperinflation is the situation when people give up money and switch to barter. Hyperinflation usually occurs during periodic crises and wars.
Inflation can rise for many reasons:
- Increase in demand. Any shortage causes a rapid rise in prices. When manufacturers have additional capacities, prices begin to decline.
- Supply reduction. This happens if demand remains the same, but goods and services become smaller. This may depend on crop failure, restrictions on the import of foreign goods, the actions of a monopolist in a certain market.
- The weakening of the national currency. If the exchange rate of foreign currencies grows, then imported goods automatically rise in price.
- High inflationary expectations. When people and companies expect prices to rise dramatically, they often begin to change their consumer behavior. Companies, for their part, start raising prices for their products.
High inflation is always bad for the economy, for the businesses, for the financial markets and, of course, for the local population. People make obvious financial decisions: they spend money as soon as possible, invest in valuable goods, real estate and buy foreign currency. It becomes unprofitable to make savings and open deposits. Bank customers withdraw money from their accounts.
High inflation is also unpredictable - it accelerates or moves in leaps and bounds. Due to the growing instability in the financial markets, it becomes unprofitable for entrepreneurs to take long-term loans. It is impossible to plan ahead - and this is the most important condition for the growth of investment and the economy as a whole.
It may seem that fixing prices at a certain level is a good solution. But such artificial intervention in the economy will lead to an increase in the imbalance between supply and demand. Manufacturers will not understand how much goods to produce, shops - how much to buy, and as a result, buyers will have to stand in lines at empty counters.
It is for these reasons that in a market economy, prices should be dictated by the market, not the state.
