Inflation can be seen as the biggest obstacle in the way of hitting macro level economic targets. In terms that are widely accepted, inflation is the “mother of all evils in the economy”
The most commonly used definition in the literature for inflation is the continued increase in prices and continued depreciation of the monetary currency in circulation.
The causes of inflation are usually grouped under three main headings, which are monetary factors, real factors and structural factors.
In terms of the reasons that bring about inflation, we can speak about three types: demand-pull inflation, cost inflation and structural inflation.
Demand-pull inflation: The situation in which aggregate demand level exceeds the supply, causing prices to rise continuously.
Cost inflation: The increase in the price of products or services as a result of raw materials and wages costing more.
Structural inflation: inflation relating to a combination of causes including the level of development of an economy; the role played by the government in the economy and the effectiveness of democratic institutions independently of cost or demand pull inflation. It is the result of the merging and interaction of many factors at once, including, for example, the savings and consumption habits of the locsals; the level of financial literacy or the customs and traditions prevalent in the given society.
The main reason why we provide basic information about inflation can be attributed to the need to determine the type of inflation in a given country in order to develop appropriate policies, much like a doctor making a diagnosis before starting treatment on their patient. For example, if the inflation being dealt with is demand-pull inflation, the treatment would include money, credit, budget and demand control and management; If it is cost inflation, it would be necessary to prioritize wage and price policies.
Reasons behind structural inflation
The main problem in developing economies is the inability to change the existing structures due to their rigidity and the failure of producers to adapt to demand variability in a short time. Factors such as low levels of resource mobilization, working capital, foreign exchange and lack of a qualified workforce are the main factors in the emergence of structural inflation.
Price hikes on imported inputs and public spending made due to natural disasters or wars abroad can be listed among the external factors that drive the structural inflation process.
High inflation expectations for the future also have an impact on buying behavior. The fact that individuals and institutions start buying goods and services ahead of time in order to avoid paying higher prices in the future, acts as a whip driving inflation, causing it to rise even more.
Increase in the money supply creates inflation
Frequent price raises introduced to the wages of both public and private sector employees may cause constant price increases to be introduced by the private sector. Additionally, this situation causes labor unions to demand wage increases based on rising prices (inflation) in collective bargaining talks.
In addition to the above, the need for a higher budget by constantly increasing public expenditures is an example of structural inflation. The continuing expenditures cause a deficit as a result of inadequacy of public revenues such as problems with tax collection; and this deficit in turn pushes structural inflation into a perpetual dynamic.
Although it is accepted as a general rule that an increase in the money supply creates inflation, it should not be forgotten that the factor that really drives inflation is the speed of circulation of the money available. In other words, extra money supply sitting in the bank will not create inflation. This indicates that focusing on the factors that cause an increaee in the supply of money and expenditures is necessary to combat structural inflation.
Foreign trade deficits are also an example of structural inflation, since the deficits in foreign trade volimes lead to a decrease in the value of the national currency due to the increasing demand for foreign currency, causing an increase in the cost of imports on the basis of the national currency.
Conclusion
The tye of inflation plaguing particularly developing economies stemming from structural problems in these economies being the structural kind of inflation appears to be a likelier possibility.
Bu haberin/makalenin tamamı ya da bir kısmı kaynak gösterilmeden yayımlanamaz. Kaynak gösterilse dahi aktif link verilerek kullanılabilir. Kaynak göstermeden ve aktif link vermeden yayımlayanlar hakkında yasal işlem başlatılır.
