Inflation, the evils of inflation, causes of inflation, expected inflation

From pxhere

 

What is inflation?

An important economic concept directly related to prices is inflation. Inflation is a phenomenon in which prices continue to rise, and inflation has a negative impact on the economy.

 

The evils of inflation

The purchasing power of money decreases. It reduces real income and lowers motivation to work. And as funds move from financial assets to real assets like real estate, interest rates rise and investment shrinks. Also, the current account deteriorates. This is because when prices rise, export prices rise relatively, and import prices fall relatively, reducing exports and increasing imports. Finally, various costs such as transaction costs increase.

 

When inflation occurs, households frequently go in and out of the bank while making less deposits in the bank. And when inflation occurs, wage negotiations between labor and management frequently increase costs. During inflation, companies often have to replace their prices, which incurs related costs. In the case of inflation investment, this is a time when interest rates rise rather than highly volatile products such as stocks, so investing in high-interest deposits or installment savings can lead to stable high returns.

The cause of inflation

Changes in supply and demand
As demand increases and prices rise, recession inflation occurs. So-called demand-driven inflation. The aggregate demand curve has shifted to the right due to increased currency, increased government spending or tax rate cuts, and increased household income. Conversely, when production technology increases supply due to falling energy prices, the aggregate supply curve shifts to the right. At this point, production increases and prices fall.

 

Cost-increasing inflation
The supply curve shifts to the left due to rising raw material prices, rising wages and exchange rates, rising distribution costs, and rising real estate rents. At this time, prices go up and output goes down, for example, the oil shock causes prices to go up and the economic growth rate is negative.

Distribution Structure and Competition Structure
It is when the price of monopoly items increases or when prices are increased by collusion within the distribution structure. At this time, the government can stabilize prices while regulating price fixing. In the market, price-destroying large discount stores lower prices.

 

Expected inflation
Expected inflation is a prediction of future prices. In other words, it is the forecast that economic players will make about how much more prices will rise or fall in the future. The high expected inflation is a market atmosphere that sees much room for inflation next year.In the case of expected inflation, it is also the background of wage increases. In the case of labor unions, based on expected inflation next year, wage increases will be reflected in the production again, resulting in an overall inflation. The market has been shocked by the recent high inflation in the U.S. from the University of Michigan.