Inflation Essays (1274 words) - Inflation, Deflation, Hyperinflation

Inflation ?INFLATION? Inflation, in economics, is used to describe an increase in the value of money; in relation to the goods and services it will buy. Inflation is the sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increase cause the purchasing power of money and other financial assets with fixed values, creating serious economic uncertainty. Inflation results when actual economic pressures anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by undecided productivity and marketplace constraints. Constant price increases were historically linked to wars, poor harvests, political upheavals, or other unique events. Examples of inflation have occurred throughout history, but detailed records are not available to measure trends before the Middle Ages. Economics historians have identified the 16th to early 17th centuries in Europe as a period of long-term inflation. Major changes occurred during the American Revolution, when prices in the U.S. rose an average of 8.5 percent per month, and during the French Revolution, when prices in France rose at a rate of 10 percent per month. Theses relatively brief events were followed by long periods of alternating international inflations and deflations linked to specific political and economic actions. The U.S. reported average annual price changes as follows: 1790 to 1815- up 3.3 % 1815 to 1850- down 2.3 % 1850 to 1873- up 5.3 % 1873 to 1896- down 1.8 % 1896 to 1920- up 4.2 % 1920 to 1934- down 3.9 % Consumer prices accelerated during the World War 11 era, rising at an average rate of 7.0% from 1940 to 1948, and then stabilizing from 1948 to 1965, when annual increases averaged only 1.6 percent. There is various kind of inflation. When upward trend of prices is gradual and irregular, averaging only a few percentage points each year, inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than cost; and personal, business, and government borrowers realize that loans will be repaid with money that has potentially less purchasing power. A greater concern growing is chronic inflation. Chronic inflation tends to become permanent moving upward to even higher levels as economic distortions and negative expectations are brought on. To accommodate chronic inflation, normal economic activities are disrupted: Consumers buy goods and services to avoid even higher prices, real estate speculation increases; businesses concentrate on short-term investments; governments rapidly expand spending in anticipation of inflated revenues; and exporting nations suffer competitive trade disadvantages forcing them to turn to protectionism currency controls. In the extreme form, chronic price increases become hyperinflation, causing the entire system to break down. During a hyperinflation the growth of money and credit becomes explosive, destroying any links to real assets and forcing a trust on complex barter arrangements. As the governments try to pay for increased spending programs by rapidly expanding the money supply, the inflationary financing of budget deficits disrupts economic, social, and political stability. There are many causes of inflation. The demand -pull inflation occurs when aggregate demand exceeds existing supplies, forcing price increases and pulling up wages, materials, and operating and financing costs. Cost-push inflation occurs when prices rise to cover total expenses and preserve profit margins. A persistent cost-price spiral eventually develops as groups and institutions respond to each new round of increases. Deflation occurs when the spiral effects are reversed. To explain why the basic supply and demand elements change, economists have suggested three substantive theories: the available quantity of money; the aggregate level of incomes; and supply-side productivity and cost variables. Monetarists believe that changes in price levels reflect fluctuating volumes of money available, usually defined as currency and demand deposits. They argue that, to create stable prices, the money supply should increase at a stable rate matching with the economy's real output capacity. C ritics of this theory claim that changes in the money supply are a response to, rather than the cause of, price-level