The economy is a field with extremely delicate balances. Even when everything seems fine, it can suddenly turn upside down. For example, while the negative effects of the pandemic have almost come to an end all over the world, strangely, we see that inflation has increased at different rates all over the world, especially in our country. Inflation, in its most basic sense, means the decrease in the value of money and the purchasing power of the people.
The actions of the political power that governs the countries, of course, affect the economy and inflation, but the institutions that should control this situation all over the world are the central banks. Even if the citizens do their best, state institutions should intervene in the inflation balance, since a much larger economic structure is mentioned. Let’s take a closer look at questions such as what is inflation and why it rises.
Let’s start with the basics, what is inflation?
In its most basic definition, inflation is the decrease in the purchasing power of the currency in use in that country. This decline over time is revealed by examining the prices of a basket of certain goods and services. It is expressed as a percentage. An increase in the inflation percentage means that the currency has a much lower purchasing power compared to the previous period.
Inflation is much more than just a price increase for a few products. People have some basic needs such as food, fuel and so on to continue their daily life. Along with these basic needs, there are also different products that affect the service sector. According to the results of an evaluation made on the prices of all these, if the prices are much higher than the previous period and the purchasing power of the people has decreased, here is inflation.
There are many different needs of people such as grain, metal, fuel, electricity, transportation, health and entertainment among the products and services whose prices are examined by adding them to the inflation basket. As the currency in question depreciates, the public’s access to these products and services decreases. As a result, the economic growth of that country and even other countries with which it has economic relations is adversely affected. In other words, inflation is not only the decrease in the purchasing power of the people, but also the slowdown or even stopping of the economic growth of that country.
What are the types of inflation?
- Demand pull inflation
- Cost push inflation
- Internal inflation
Demand pull inflation:
Demand pull inflation, also known as the demand pull effect, occurs when the increase in the money and credit supply in the market overgrows the economy. Each producer has a certain production capacity and a certain demand of the public. If there is an abundance of money and production grows faster than its economic capacity, price increases will occur.
In other words, just as little money in the market, too much money causes inflation. The person with a lot of money spends higher with positive consumer sentiment. As demand increases, prices also increase. Since the supply-demand balance does not occur, a gap occurs. Because the economy does not accept such gaps, price increases occur.
Cost push inflation:
Cost push inflation, also known as cost inflation for short, is the imbalance between the basic ingredients of the production process and the profit at the end of production. With the increase in money and credit supply, when all these are channeled into a single commodity, the economy is affected. Economic gaps occur due to the supply – demand imbalance on the commodity in question.
Money is plentiful, everyone wants to buy the same production good, but there are not enough goods. Thus, the price increases. The producer, who buys the goods expensive, has to sell the product expensive, but the consumer cannot buy it. The most basic example of cost inflation is oil prices. Even if you do not buy oil directly, since oil prices increase, the prices of all products that are remotely related to oil increase.
Internal inflation:
It is possible to call it a kind of vicious circle for internal inflation, which is also known as built-in inflation. In the process of high inflation, people think that this economic situation will always continue in this way, and therefore the manufacturer makes a hike in their products, while the workers demand higher wages.
For the moment, a measure against inflation may seem like a necessary increase to maintain the standard of living, but this causes inflation to continue and even increase. If everyone has more money, the price of goods and services will increase. This situation, known as the wage-price spiral, constantly triggers each other. This situation, in which the reverse is also true, creates a vicious circle.
Why does inflation rise? Reasons:
- Government printing and distributing money
- Legal depreciation of tender currency
- Borrowing money from banks’ reserves by purchasing government bonds
These are the three most common causes of inflation. Let’s summarize because it’s a bit complicated, the main cause of inflation is the increase in the money supply. In other words, the more the same currency in the market, the lower the purchasing power of that currency, which causes inflation. It is the monetary authorities of that state that increase the money supply.
How is inflation calculated?
Inflation is found as a percentage as a result of calculating the price index variables by collecting the selected goods and services in a basket at that time. Inflation can be calculated bimonthly, annually or in different periods. While calculating inflation, index types such as consumer price index, wholesale price index, producer price index can also be taken as a basis. To give a general formula for calculating inflation;
- Percentage Inflation Rate = ( Final Consumer Price Index Value / Initial Consumer Price Index Value ) x 100
This is the basic methodological formula applied to calculate inflation. You can also find many inflation calculators on the Internet. Of course, this process is done over the values that are accepted as correct for the moment. If the consumer price index value is as explained, this formula will give correct results.
Advantages and disadvantages of inflation:
Inflation is generally considered a bad economic situation, but there are some exceptions. For example, if you have a property or stock goods priced in your own currency, you can sell with a much higher profit rate thanks to inflation. Inflation is also advantageous for people who speculate in order to make high profits on company shares.
Of course, when we put our hands on our conscience, we should say that inflation is only a disadvantage. Who wants the purchasing power of money to decrease? The fact that product X, which was purchased for 10 units a month ago, is 50 units this month does not satisfy neither the consumer nor the producer. Because even if the consumer’s salary and the producer’s income seem to increase, there is always a loss because the expenditures increase at the same or even higher rate.
We answered questions such as what is inflation, an economic situation that deeply affects our country and the world, why it rises, what are its types, and we talked about the details you need to know about the subject. One last sentence; Don’t be hopeless, what we’ve been through.
43995
