Basic concepts
Inflation generally refers to the depreciation of banknotes and rising prices caused by the amount of banknotes issued exceeding the actual demand for commodity circulation. The essence is that the total social demand is greater than the total social supply.
Inflation in modern economics means an increase in the overall price level. General inflation is the decrease in the market value or purchasing power of a currency, while currency depreciation is the relative decrease in currency value between two economies. The former is used to describe the national currency value, while the latter is used to describe the added value in the international market. The correlation between the two is one of the controversies in economics.
Inflation refers to the phenomenon of comprehensive and sustained price increases in economic operations. The issuance of banknotes exceeds the actual amount of money in circulation, which is one of the main causes of inflation.
Various explanations
Different schools of thought have different theories on the causes of inflation.
1. Monetarist explanation
The most well-known and direct theory of inflation is that inflation is caused by the money supply rate being higher than the growth of the economy. This theory advocates measuring GDP deflator by comparing it with money supply growth, and having the central bank set interest rates to maintain the money quantity. This view differs from the Austrian view below in that it focuses on the quantity rather than the substance of money. Under the monetarist framework, the aggregation of currencies is the focus.
The quantity theory of money, simply put, means that the total amount of money consumed by an economy depends on the total amount of existing money. The following formula was created from this theory: p is the price level of general consumer goods, dc is the total demand for consumer goods, and sc is the total supply of consumer goods.
The concept behind the formula is: when the total supply of consumer goods relative to the total demand for consumer goods decreases, or the total demand for consumer goods relative to the total supply of consumer goods increases, the prices of general consumer goods will increase accordingly. Based on the view that total expenditure is mainly based on the total amount of money in existence, economists use the total amount of money to calculate the total demand for consumer goods. Hence, they conclude that total spending and the total demand for consumer goods increase with the total amount of money. Therefore, scholars who believe in the quantity theory of money also believe that the only reason for rising prices is economic growth (which means that the total supply of consumer goods is increasing), and that the central bank uses monetary policy to increase the total amount of existing money.
From this point of view, the most fundamental cause of inflation is that the money supply exceeds the demand, so "inflation is a monetary phenomenon that will definitely occur everywhere," Friedman said. It means that the control of inflation depends on monetary and fiscal restrictions. The government cannot make borrowing too easy, nor can it lend itself too much. This view focuses on central government budget deficits and interest rates, as well as economic productivity, that is, cost-pull inflation driven by production costs (aggregate supply).
2. Interpretation of New Keynesianism
(neo-keynesian) According to New Keynesianism, there are three main forms of inflation, which are what Robert J. Gordon calls the "triangular model" "Part of:
·Demand-pull inflation - Inflation occurs when high demand and low unemployment are generated by GDP, also known as Phillips curve inflation.
·Cost-push inflation - now called "supply shock inflation", occurs when oil prices suddenly increase.
·Built-in inflation - caused by reasonable expectations, usually related to the price/wage spiral. Workers hope to continue to increase wages, and the costs are passed on to product costs and prices, forming a vicious cycle. Intrinsic inflation reflects events that have already occurred and is considered residual inflation, also known as "inertial inflation" or even "structural inflation."
3. Phillips Curve Inflation Theory
(phillips curve) (or demand side): The demand-driven theory mainly focuses on the money supply: inflation can be determined by the amount of money in circulation. Relates to the economy's supply capacity (its potential output). This is particularly true when a government (perhaps during a foreign war or civil war) prints too much money to cause a financial crisis, sometimes leading to hyperinflation that causes prices to skyrocket (or to the extent of doubling every month).
Money supply also plays a major role in moderate inflation, but its importance is controversial. Monetarist economists believe that there is a strong link; in contrast, Keynesian economists emphasize the role of aggregate demand in it, and money supply is only the decisive factor in aggregate demand.
Here I directly put forward what I think is the real cause of inflation (CPI): "The real cause of inflation is capital's requirement for the equalization of profit rates. In other words: the same unit of capital requires Equal return on investment, that is, undifferentiated capital. However, in reality, undifferentiated capital cannot exist. This is often affected by the difficulty of capital entering the industry or industry, so the difficulty of capital entering the industry or industry produces average profits. This kind of objectively existing differential profit rate between industries or industries can achieve a certain equilibrium under complete market conditions. Once this equilibrium is broken, it will widen the profit rate ratio between industries or industries, thus Produce inflation. The ease of capital entering a trade or industry is affected by factors such as interest rates, division of labor, industry productivity, investment scale, degree of confidentiality of science and technology, human resources, brand, reputation, patents, standards, availability of raw materials, etc. .
Inflation is an inherent attribute of the capitalist economy. In real life, the promotion of innovation, fluctuations in market demand, labor bargaining, etc. will cause differences in capital profit rates, and thus prices will be distorted. The most important thing is that the promotion of science and technology makes investors feel that there is a difference in investment and the profit rate should also be different; therefore, inflation usually occurs when interest rates are lowered and the currency supply is sufficient. At this time, those who have sufficient Funds will quickly flow from industries with low profit margins to industries with high profit margins; that is, the more working capital there is, the more urgent the requirement for industry profit margins to be equalized. In the period of high interest rates, funds are in short supply, and various industries are required to equalize profit margins. The requirements are not high, so the profit margin difference between industries is high. However, if the relative profit margins of various industries are fully distorted, inflation may also occur under high interest rates. The CPI index is an inaccurate concept because it cannot. Including all goods, in fact, the goods not included are often more instructive. For example, innovative products are sold at high prices when they enter the market and account for a small proportion of GDP; while other products that will be eliminated are priced at low prices and account for a small proportion of GDP. The proportion is also low, and statistical indicators often ignore it.
Breaking the balance is often determined by the variability of cost, demand, and innovation, which in most cases are not controlled by the enterprise. Decisions, such as costs: raw materials and human capital are determined externally; demand is determined by customers. Demand fluctuates greatly during economic expansion and recession; innovation often changes productivity, so innovation is determined by the relativity of innovation results between industries. , and it is highly contingency. Performance factors
One of the effects of stable and small inflation is that it is difficult to renegotiate prices, especially for wages and contracts, so if prices rise slowly, Relevant prices are easier to adjust. There are many types of prices that will "stay in price" but rise quietly, so the effect of zero inflation (price stabilization) will affect other aspects in the form of lower prices, profits, and employment. . Therefore, the executive departments of some companies regard moderate inflation as "lubricating the ship of business". The pursuit of complete price stability will bring about extremely devastating deflation (continuous lowering of prices), which will lead to bankruptcy and economic recession ( or even economic depression).
The financial system regards the "potential risk" of inflation as a fundamental investment inducement higher than the accumulation of wealth through savings. In other words, inflation is what the market says about the time value of money.
That is, because a dollar today is worth more than a dollar next year, there is an economic deduction for future capital value. This view views inflation as uncertainty about the future value of capital.
For the lower classes, inflation often increases the negative impact of prior discounting of economic activity. Inflation is usually caused by government policies to increase the money supply. All the government can do to influence inflation is to tax stagnant money. When inflation rises, the government increases the tax burden on stagnant funds to stimulate consumption and borrowing, which increases the flow of funds and intensifies inflation, forming a vicious cycle. In extreme cases, hyperinflation will form
International trade: If the domestic inflation rate is low, the reduced trade balance will undermine the fixed exchange rate.
Sole cost: Because the value of cash shrinks during inflation, people tend to hold less cash during periods of inflation. The term implies that the true cost will more often flow to the banks. (The term sole cost is a joke, referring to the cost of wearing out the soles of shoes from walking to the bank.)
Menu costs: Stores need to be more diligent in changing product prices. This term refers to the cost a restaurant spends on reprinting menus.
Hyperinflation: If inflation rises out of control, it will interfere with normal economic activities and damage supply capacity.
In an economy, some sectors will be included in the inflation index, while some sectors will not. Inflation behavior will be redistributed from the non-incorporated sectors to the included sectors. When the magnitude of the impact is small, this is a policy choice not to tax savings but rather to tax liquidation priorities and funds on hand. If the impact exceeds a certain range, the effect will be distorted and become an individual's "investment in inflation," which is to encourage the expectation of inflation.
Because the above reasons for combating inflation outweigh the small impact required to combat its expected behavior and the holding of large amounts of money, most central banks take price stability into consideration by maintaining a visible but extremely low level of inflation. Inflation is targeted.
Influencing factors
In the case of inflation, it will definitely have an impact on social and economic life. If the inflation rate in society is stable and people can fully expect it, then the inflation rate will have little impact on social and economic life. Because under this kind of predictable inflation, various nominal variables (such as nominal wages, nominal interest rates, etc.) can be adjusted according to the inflation rate, so that the actual variables (such as real wages, real interest rates, etc.) Change. At this time, the only impact of inflation on social and economic life is that people will reduce the amount of cash they hold. However, when the inflation rate cannot be fully anticipated, inflation will affect social income distribution and economic activities. Because at this time people cannot accurately adjust various nominal variables and the economic actions they should take based on the inflation rate.
(1) Between the debtor and the creditor, inflation will benefit the debtor and not the creditor
Under normal circumstances, the debt contract for lending is based on the currency at the time of signing. The inflation rate is used to determine the nominal interest rate, so when unexpected inflation occurs, the debt contract cannot be changed, thus causing the real interest rate to fall, the debtor benefits, and the creditor suffers. The result is an adverse impact on loans, especially long-term loans, making creditors reluctant to grant loans. The reduction in loans will affect investment and ultimately reduce investment.
(2) Between employers and workers, inflation will benefit employers and disadvantage workers
This is because, under unpredictable inflation, the wage growth rate will It cannot be adjusted quickly to the rate of inflation, causing real wages to fall even when nominal wages remain unchanged or increase slightly. A fall in real wages increases profits. Increased profits help stimulate investment, which is why some economists advocate mild inflation to stimulate economic development.
(3) Between the government and the public, inflation will benefit the government but not the public
Because under unpredictable inflation, nominal wages will always increase. increase (although it does not necessarily maintain the original real wage level), as the nominal wage increases, more people reach the tax threshold, and many people enter higher tax brackets, which makes the government’s tax Increase. But the amount of tax paid by the public has increased, while real income has decreased. The tax revenue the government receives from this inflation is called the "inflation tax." Some economists believe this is actually government plundering the public. The existence of this inflation tax is not conducive to the increase of savings, but also affects the enthusiasm of private and corporate investment.
Since the reform and opening up, our country has experienced three relatively serious inflations, which occurred in 1980, 1988 and 1994 respectively.
Measurement Factors
Inflation is measured by observing changes in income from a large number of services or prices of goods in an economy, usually based on data collected by the government, and The Journal of Trade Unions and Business also conducted such a survey. Prices and income from labor services together form the price index, which is the basis for measuring the average price level of the entire group of items. The inflation rate is the increase in the index. The price level measures overall prices, while inflation refers to the increase in overall prices.
There is no single, reliable measure of inflation because the value of inflation depends on the price share of specific items in the price index and the scope of the economic area being measured. Common measurement methods include:
CLI (cost of living index) is the theoretical increase in personal living expenses, which is roughly estimated by consumer price indexes (consumer price indexes). Economists have different views on whether a specific CPI value should be estimated to be higher or lower than the cli value. This is because the CPI value is recognized to be "biased". The CLI can be adjusted using “purchasing power parity” (ppp) to reflect the wide disparity between regional and world prices.
The consumer price index (CPI) measures the price of goods purchased by a 'typical consumer'. The annual percentage change in the index is the most commonly reported inflation curve in many industrial countries. This measurement is often used in salary and compensation negotiations because employees hope that their salary (nominal) will be equal to or higher than CPI. Sometimes labor contracts include cost of living escalators, which means that nominal wages will be automatically adjusted as the CPI increases. The timing of the adjustment is usually after inflation occurs, and the range is lower than the actual inflation rate.
Producer Price Indexes (PPI) measure the price at which producers purchase materials. They are different from CPI in terms of price subsidies, profits, and tax burdens, resulting in the income and consumption of producers. There is a gap in the efforts of those who pay. PPI rises in response to rising CPI, with a typical delay. Although it has a diverse mix, it is generally believed that this delayed characteristic makes it possible to roughly estimate tomorrow's CPI inflation based on today's PPI inflation (rough-and-ready); the various discussions and contents have extremely important differences.
The wholesale price index measures changes in wholesale prices of selective goods (especially sales tax) and is very similar to the PPI.
The commodity price index (commodity price index) measures changes in the selling prices of selective commodities. If the gold standard is used, the commodity of choice is gold. The United States uses a bimetal system, and its index includes both gold and silver.
The GDP deflator is a calculation based on gross domestic product: nominal GDP and inflation-corrected GDP (constant-price GDP or real GDP). The proportion of money used between persons (see Real and Nominal Economy). This is the most macroscopic measure of price levels. This index is also used to calculate components of GDP such as personal consumption expenditures. The U.S. Federal Reserve instead uses the core personal consumption deflator and other deflators as a reference for formulating "anti-inflation policies."
Personal consumption expenditures price index (pcepi). On February 17, 2000, in the semi-annual congressional financial policy report (also known as the Humphrey-Hawkins Report), the Federal Open Market Committee (FOMC) announced that it would change the main inflation measurement method from cpi to chain-linked Personal consumption expenditures price index.
Because each measurement method is based on another measurement method and combined in a fixed pattern, economists often debate whether there are "biases" in various measurement methods and inflation patterns. For example, the Boskin Commission in 1995 found that the CPI calculated by the U.S. Bureau of Labor Statistics (bls) was biased. After conducting a quantitative analysis of its deviations, they concluded that the inflation in that year was overstated. The increase in technological innovation brought about by "hedonic" and the replacement of expensive goods with affordable goods will both reduce the increase rate of CPI-U. Another example is that in the early 1980s, unoccupied rental units were not included in the rental income component of CPI-U and CPI-W; after adding this component, the inflation rate was actually extremely understated, so This change was added to the CPI calculation in 1982.
There is ongoing debate over whether hedonic adjustments should be included, including the tendency of people to move to cheaper areas when higher-priced areas become out of reach. Some people also believe that the home purchase part of the index extremely underestimates the impact of daily living expenses on housing prices, and also extremely underestimates the importance of medical expenses in retirees' daily expenses.
Opposite concept
·Deflation
1. Difference
⑴ Different meanings and essences: Inflation refers to the issuance of banknotes Exceeding the quantity required in circulation leads to the economic phenomenon of devaluation of banknotes and rise in prices. The essence is that the total social demand is greater than the total social supply.
Deflation is an economic phenomenon opposite to inflation. It refers to an economic phenomenon in which the overall price level continues to decline for a long time and the currency continues to appreciate during a period of relative economic contraction. The essence is that the total social demand continues to be less than the total social supply.
⑵ Different manifestations: The most direct manifestation of inflation is the devaluation of banknotes, rising prices, and reduced purchasing power. Deflation is often accompanied by declining production, shrinking markets, lower corporate profit margins, reduced production investment, increased unemployment, declining income, and weak economic growth. Mainly manifested by low prices, with prices of most goods and services falling.
⑶ Different causes: The main cause of inflation is that the total social demand is greater than the total social supply, and the amount of money issued exceeds the actual amount of money needed in circulation. The main causes of deflation are that the total social demand is less than the total social supply, the long-term industrial structure is unreasonable, the formation of a buyer's market and export difficulties.
⑷The hazards are different: Inflation directly devalues ??banknotes. If residents' income does not change, living standards will decline, causing chaos in social and economic life, which is not conducive to economic development. However, within a certain period of time, moderate inflation can stimulate consumption, expand domestic demand, and promote economic development.
Deflation leads to falling prices, which is good for residents' lives to a certain extent, but in the long run it will seriously affect investor confidence and residents' consumer psychology, leading to vicious price competition, which is detrimental to the long-term development of the economy and the long-term interests of the people. .
⑸ Different control measures: The most fundamental measure to control inflation is to develop production and increase effective supply. At the same time, measures such as controlling the money supply, implementing moderately tight monetary policies and fiscal policies within the means of income must be adopted. To control deflation, we need to adjust and optimize the industrial structure, comprehensively use investment, consumption, export and other measures to stimulate economic growth, implement proactive fiscal policies, sound monetary policies, correct consumption policies, and adhere to the policy of expanding domestic demand.
2. Connection
⑴ Both are caused by the imbalance between total social demand and total social supply, that is, the imbalance between the amount of money actually needed in circulation and the amount of issuance. of.
⑵ Both will distort price signals and affect normal economic life and social and economic order, so effective measures must be taken to suppress them.
Manifestation
·Typical manifestation - rising prices
Generally speaking, inflation will inevitably cause rising prices, but it cannot be said that all rising prices are caused by inflation. swell. There are many factors affecting price increases.
①The issuance of banknotes must be limited to the amount required for circulation. If too many banknotes are issued, the value of banknotes will depreciate and prices will rise.
②The price of the commodity is directly proportional to the value of the commodity. As the value of the commodity increases, the price of the commodity will rise.
③ Prices are affected by supply and demand. When the supply of goods exceeds demand, prices will rise.
④ Policy adjustments and straightening out the price relationship will cause an increase.
⑤ Poor circulation of goods, poor market management, arbitrary fees and fines will also cause an increase in commodity prices. It can be seen that the rise in prices is inflation only if the rise in prices is caused by the excessive issuance of banknotes.