Defining Inflation

Inflation is a steady rise in prices, owing to which, incomes and cost savings of the population will diminish. Even the weakest inflation threatens for the advancement of the modern financial economy. For that reason, all nations (including the most developed ones), take anti-inflationary measures to reduce convexity rates.

What triggers?

The first of them is the growth of incomes of the population, not supported by a corresponding advance in the production of goods. This excessive need pushes up costs and increases the convexity rate. This imbalance between supply and demand for items and services can likewise be resulted by crop failures, import limitations, or actions of the monopolists. Increasing expenses of the production and rising costs of business for earnings, taxes, interest payments and others highly contributes to rise in convexity rates. The boost in rates for imported components reveals both a boost in world rates and weakening of the nationwide currency. The weakened nationwide currency can straight impact the prices of the end products imported from abroad. The overall result of exchange rate modifications on rate characteristics is called the “transfer result” and is frequently considered as a different hyperinflation element. An important function in the advancement of the inflationary procedure is played by the so-called waiting minutes. The expected increase in prices forces the population to purchase items. Hence, a deficit is developed for a few of them, and, subsequently, prices are increasing. It is challenging to reduce such inflationary expectations.Inflation

The repudiation of such guideline (after the war or in countries that have passed from an administratively controlled to a market economy) often generates “galloping convexity” with a crazy rate increase.
The other types of inflation consist of:

– Administrative inflation – is produced by “administratively” ran costs;

– Galloping inflation – is in the form of the spasmodic boost in costs;

– Hyperinflation – is with a high growth rate of the prices;

– Built-in inflation – defined by the average level for a certain amount of time;

– Imported inflation – it brought on by the impact of external aspects, for instance, extreme inflow to the country of foreign currency and an increase in import costs;

– Induced inflation – it triggered by the impact of aspects of the financial nature, external elements;

– Credit inflation – it brought on by excessive credit growth;

– Unforeseen inflation – the rate of convexity which has appeared above anticipated for a specific duration;

– Expected inflation – the estimated rate of convexity in the future period owing to the action of aspects of the existing period;

– Open inflation – convexity due to increase in prices of consumer goods and production resources;

Negative Consequences of High Inflation

High convexity rate reduces buying the power of all financial entities which negatively impacts need, the economic development, the requirements of living of the population, and moods in society. High convexity is accompanied by the increased uncertainty which makes complex decision-making of financial entities.

The best ways to reduce?

Battling inflation, as the experience of industrialized nations shows, is very challenging. It seems simple: freezing costs or present some form of policy for rates. Regrettably, this approach works for a brief time just. The freezing of costs will soon be set off by a boost in the deficit of goods and will further intensify convexity. This helps to reduce costs because those who have cash want to keep it and wait, instead of spending it. It likewise means less offered credit, which also decreases spending.

Inflation is a constant increase in prices, owing to which, incomes and savings of the population will depreciate. The total impact of exchange rate changes on rate characteristics is called the “transfer effect” and is frequently viewed as a separate convexity aspect. In a regulated economy (such existed in the USSR), as well as in wartime conditions, when costs are fixed, it can have a concealed character – this is so-called reduced convexity. The repudiation of such guideline (after the war or in nations that have passed from an administratively regulated to a market economy) frequently generates “galloping inflation” with a frenzied price increase. The freezing of prices will quickly be activated by the rise in the deficit of goods and will further worsen inflation.