Inflation – the rise in prices for goods and services. When inflation occurs, the depreciation of money , decreases the purchasing power of the population. The process inverse to inflation, that is, the decline in prices, is called deflation.
In terms of price growth, inflation is usually divided into three types.
Creeping inflation means that prices grow gradually, by about 3-5% per year, as it happens in developed countries. Moderate inflation is a positive factor for the economy, it stimulates demand, contributes to the expansion of production and investment.
Galloping inflation is typical for developing countries. The price increase is 10-50% year on year.
Hyperinflation – a companion of crises and wars. The price increase exceeds 50% and can reach astronomical values. Most often occurs when the state “includes” a printed money machine to finance its exorbitant costs.
The main causes of inflation include the following factors:
– reduction of gross domestic product (GDP) with a constant amount of money in circulation;
– the growth of government spending due to emissions;
– excessive expansion of lending to companies and individuals;
– monopolism in the economy, when large firms are able to determine the cost of their products and costs.
Main indicators of inflation – the consumer price index , producer price index , GDP deflator, purchasing power parity , the Paasche index.
If the government of the country will pay attention to some measures to reduce inflation, the economic situation in the country will be under control.
The most effective way to influence the level of inflation is to apply the policy of influencing the interest rate or the refinancing rate of central banks in a modern market economy.