INFLATION

Inflation: Problems, Causes and Predictions



Introduction

Inflation is defined as the widespread and continuing increase in prices. To be more precise, inflation is an excessive increase in money supply relative to the volume of production.

Discussion

The causes and origins of inflation

The primary cause of the phenomenon is due to inflationary binge Application (DG) compared to the offer (Global Demand = Consumption + investment + exports). The mode of financing of investment can also be inflationary (in so far as the high interest rates are systematically integrated into the sale price). This phenomenon is called "inflation by demand."

The excess cash or liquidity resulting from increased cash balances by economic agents. This increase will raise prices until such time as the amount of money in circulation is equal to that of the application - that is why the Bank of France (and now the European Central Bank) controls money creation by banks.

Third cause of inflation: rising production costs (cost of labor, social security, commodities, interest rates, and the value of money). We called this phenomenon "cost-push inflation."

As salary increases accompanying higher productivity, it is not inflationary

The consequences of inflation

It is necessary to measure the impact on households and businesses. Households may be losers if wages do not follow up. In inflationary times, it must borrow because inflation reduces the costs of loan repayments. Moderate inflation and strong credit can stimulate investment and therefore consumption. Inflation is not always a "disease". Besides the glorious period of 30 years, U.S was characterized by a steady inflation. Most affected by inflation are low-income households and pensioners.

For companies:

- Impact on the companies' exports is less competitive causing Currency devaluation.

- This allows unprofitable companies to survive, but are a little dangerous because the long term could potentially lead to the demise of some companies thus increasing unemployment.

- In times of inflation, companies overlook the technical progress.

- Inflation distorts the price structure.

How to fight against inflation

- The fastest to implement, it is monetary policy, which will aim to limit money creation (reduced liquidity in the economy) (Kuttner, 2004)

Direct Means: Policy interest rate

Indirect Methods: Supervision of credit.

Generally, it is quite effective against inflation.

- Implementation of fiscal policies (higher taxes, reduced state spending).This is to limit aggregate demand.

- Price policy, this can range from price controls to lock in prices. A policy of freezing prices may not be ...