Money and credit - Ivanov V.М.

Topic 11. Inflation

11.1. The essence of modern inflation

The term " inflation " (from the Latin inflatio) means bloating. Indeed, the financing of public expenditures (for example, during periods of extreme economic development during wars and revolutions) by means of paper money issue with the termination of the exchange of banknotes led to a "swelling" of money circulation, a devaluation of paper money.

Inflation was typical for Russia (1869-1895), the United States - during the War of Independence (1775-1783) and the Civil War (1861-1865), England - during the war with Napoleon (early XIX century. ), France - during the French Revolution (17891791 gg.).

Particularly high rates of inflation reached Germany after the First World War, when in the autumn of 1923 the money supply in circulation reached 496 quintillion marks, and the monetary unit depreciated a trillion times. Apparently, inflation is not a product of modernity, it was the case in the past.

Modern inflation has a number of features. If earlier it had a local character, now it is widespread, global. Earlier inflation covered a greater or lesser period, i.e., had a periodic character, but now it is chronic. Modern inflation is influenced by two groups of factors: monetary and non-monetary.

To money are factors that cause the excess of money demand over the supply of goods, as a result of which there is a violation of the requirements of the law of money circulation.

Non-monetary factors lead to an initial increase in costs and prices of goods, supported by the subsequent pulling of the money supply to their increased level.

In fact, both groups of factors interact, causing a rise in prices for goods or services or inflation.

Depending on the prevalence of factors of a particular group, there are two types of inflation: demand and costs.

Inflation of demand is caused by such monetary factors:

• militarization of the economy and growth of military expenditures. Military equipment is becoming less and less adapted for use in civilian sectors, as a result of which the monetary equivalent, which opposes military equipment, turns into a factor that is unnecessary for circulation;

• State budget deficit and internal debt. Coverage of the deficit occurs through the placement of government loans in the money market (typical for the US) or through additional issue of non-vesting banknotes of the National Bank (in Ukraine);

• credit expansion of banks;

imported inflation . This is the issue of the national currency in excess of the needs of trade with the purchase of foreign currency by countries with an active balance of payments;

• excessive investment in heavy industry. At the same time, the elements of productive capital are continually extracted from the market, in return for which an additional cash equivalent comes into circulation.

Inflation of costs characterizes the impact of non-monetary factors on pricing processes:

• Leadership in prices observed from the mid-1960s to 1973, when large companies in the industries in forming and changing prices were guided by the prices set by the leading companies, i.e. the largest producers in the industry or within the framework of the local-territorial Market;

• a decline in productivity growth and a fall in production. Such phenomena are typical for the second half of the 70s. For example, if in the US economy the average annual rate of labor productivity in 1961-1973. Amounted to 2.3%, then in 1974-1980. - 0,2%, and in industry - 3,5 and 0,1% respectively. Similar processes were also characteristic of other industrialized countries. A decisive role in slowing the growth of labor productivity was played by the worsening of the general conditions of reproduction, caused both by cyclical and structural crises;

• the increased importance of the service sector. Characterized, on the one hand, by a slower growth in labor productivity in the service sector as compared to the branches of material production, and on the other hand, by the large share of wages in total production costs. The sharp increase in demand for products of the service sector in the second half of the 1960s and the early 1970s stimulated a noticeable rise in price: in industrialized countries, the growth of prices for services was 1.5-2 times higher than the growth of prices for basic goods;

• Accelerating the growth of costs and especially wages per unit of output. The economic power of workers, the activity of trade unions do not allow large companies to reduce their wage growth to the level of slow growth in labor productivity;

• energy crisis. He caused in the 70 years a significant rise in price of oil and other energy resources. As a result, if in the 1960s the average annual growth in world prices for products of industrially developed countries was only 1.5%, in the 1970s it was more than 12%.

In general, the dynamics of consumer prices in industrialized countries is characterized by the fact that the growth rate of consumer prices systematically outstrips the growth rate of GNP, which indicates the existence of inflationary processes.