What is the Inflation

6 avril 2022

According to INSEE, inflation is the loss of purchasing power of money, which results in a general and lasting increase in prices. A one-off price increase cannot therefore be described as inflation.

The causes of inflation

Three main sources of inflation are identified:

1. 1-Demand inflation: if the demand increases faster than the supply of goods, the prices increase due to the scarcity of the products. Keynesianism relies on this source of growth to encourage supply;
2. 2-Cost inflation: The increase in costs faced by businesses affects the prices of goods and services, which in turn increase. It can be an increase, either in imported products or in production costs;
3. 3-Proponents of monetarist theory identify the relationship between the money supply in circulation and inflation. The greater the money supply in circulation in an economy, the more prices rise as a result of a depreciation in the value of the currency.

The results

Often stigmatized, inflation is not always considered harmful by economists. It is often observed in developing economies, in which the demand for goods is growing faster than the supply due to the increase in purchasing power. In addition, by reducing the cost of debt, it encourages borrowing, which can stimulate the economy in the long term if the borrowing is used for investment purposes. and thus to invest.
Inflation has effects on the purchasing power of households. If prices rise faster than wages, this leads to a decline in the amount of goods and services a household can buy.
Inflation can penalize the competitiveness of an economy and foreign trade (imported products can become cheaper than domestic products).
Inflation penalizes savings above all by leading to a loss in value of the sums saved and by reducing the rate of return.

Advantages and disadvantages of inflation

Inflation can be considered a good thing or a bad thing, depending on which side you take.

For example, people with tangible assets that are denominated in currency, such as stored goods or commodities, frown upon some inflation, which raises the price of their assets.

However, buyers of these assets cannot see inflation as well and will have to shell out more money. Inflation-linked bonds or certain commodities, such as gold, are another popular option for investors to benefit from inflation.

On the other hand, people who own foreign currency assets, such as cash or bonds, also dislike inflation because it devalues ​​the real value of their assets. Investors looking to hedge their portfolios against inflation should consider inflation-hedging asset classes such as gold, commodities and real estate investment trusts (REITs).

Inflation speculation, both by companies in risky ventures and by individuals in company stock, as they hope to improve inflation performance. An optimal inflation rate is often promoted to stimulate spending to some degree, rather than save.

If the purchasing power of money declines over time, there may be a greater incentive to spend now than to save and spend later. This can increase spending, which can boost a country's economic activities. A balanced approach is supposed to keep the value of inflation within an optimal and desirable range.

Even a low and stable rate of inflation, although considered optimal by some, can cause serious problems in the economy, due to how, where and when new funds enter the economy. Whenever new fomentsnds and credit enter the economy, they are always in the hands of specific people or companies, and the process of adjusting the price level of new money supply products as new money is spent and it circulates hand in hand. Hand .

In the process, they increase some prices first, then others later. This sequential change in purchasing power and prices (known as the Cantillon effect) means that the inflation process not only raises the general level of prices over time, but also distorts relative prices, wages and labor rates. Performance over time. Economists generally believe that relative price distortions are not good for the economy, even Austrian economists believe that this process is an important factor in economic down cycles.