3.2.4. Inflation
(Inflation)
Inflation - a process of depreciation of money. It can happen for different reasons. First, the total amount of goods that can be purchased at the existing economic system in the money supply, may grow more slowly than the money supply, or even decrease (in this case, the cost of goods increases and decreases the value of money). Second, since the ratio of volume of goods and the amount of money due to not directly but through the turnover rate of money supply in the system, then an increase in the rate of turnover of money in the system, the cost decreases (the same system can saturate the smaller volume of money supply, if increase its rate of turnover). In addition, the inflation rate is strongly influenced by the amount of money withdrawn from the direct consumption through the implementation of long-term investments that do not involve a quick return, the level of deposits held in banks, the amount of the refinancing rate and so on.
The inflation rate, measured in the growth rate of prices. There are two index changes in price levels:
PPI (Producer Price Index) - index of changes in production prices (wholesale shipments of manufactured goods). This index, calculated as a percentage of the previous period, is the primary symptom of inflation, as producer prices are included in consumer prices;
CPI (Consumer Price Index) - index of consumer prices - direct measure of inflation.
The rate of inflation and exchange rate changes are inversely related. This means that the higher the inflation, the lower the corresponding currency.
Inflation has a major impact on employment. In 1958, the British economist A. Phillips proposed a graphical model of demand inflation, stating such an effect. Using the data in their work the British statistics for 1861 years, he built a curve, clearly showing the inverse relationship between changes in wage rates and unemployment rates. From the curve A. Phillips found that an increase in unemployment in Britain over 2.5-3% led to a sharp slowdown in prices and wages. Phillips concluded that the government can use to increase inflation to fight unemployment. Later this conclusion theoretically argued economist Robert Lipsey.
Phillips curve shows the inverse relationship between inflation and unemployment rate. The higher inflation rate, the lower the unemployment rate.
Also created a modification of the Phillips curve for the development of economic policy. This work was done by American economists R. Solow and Paul Samuelson. They replaced the curve in the wage rate on the rate of increase in commodity prices, or inflation. With the help of the curve was possible to calculate the balance between a sufficiently high level of employment and production, as well as the definition of price stability.
If the government considers the level of unemployment in the country as extremely high, then lowering it to be held low and monetary measures to stimulate demand. This leads to increased production and job creation. Unemployment rate decreases, but simultaneously increases the rate of inflation. These manipulations can cause "overheating" economy, and as a consequence, the crisis phenomena. This situation is forcing the government to introduce a credit restriction, reduce the costs of the state budget, etc. As a result of government action, the price level will fall and unemployment rise.
Repeated practice of economic regulation has shown that this method can be used only for short periods, because in the long term (5 years), despite the high inflation rate of unemployment continues to rise, due to a number of circumstances.
