From Latin inflatio, the term inflation refers to the action and effect of inflating. The most common use of the concept has an economic sense: inflation is, in this case, the sustained rise in prices which has negative effects on economy of a country.

This means that, with inflation, the prices of goods Y services, which generates a drop in purchasing power. For example: a worker used to buy 30 kilograms of food with his salary of 1,000 pesos. After a few months, given the existing inflation, that same salary allows him to buy just 10 kilos of food.

Price increase

Inflation is the sustained increase in prices.

Causes of inflation

This phenomenon can originate for very different reasons; Let’s look at three cases below:

* demand inflation occurs when the demand general and the productive sector is not in a position to adapt its offer, which causes prices to rise;

* cost inflation, on the other hand, appears when the costs of the producers increase (either for labor, raw materials or taxes) and these, to maintain the Benefits, they pass the increase on to prices;

* self built inflationFinally, it occurs when producers foresee price increases in the future and decide to anticipate with an adjustment in their current behavior.

Classification according to the type of increase

Likewise, there are various types of inflation, such as:

* moderate inflation: the prices they rise gradually;

* rampant inflation: prices rise at a rate of two or three digits in a year;

* hyperinflation: the rise in prices can reach 1000% per year, which reflects a serious economic crisis that causes the money of a country lose its value.

Salary

People’s purchasing power is affected when there is inflation.

Positive consequences of inflation

Although this term usually evokes times of crisis economic and despair on the part of citizens at the apparently unstoppable rise in prices, inflation also brings a series of positive phenomena.

According to him keynesianism (an economic theory), nominal wages take less time to rise than to adjust downward; When these are overvalued, this particularity can lead to an imbalance that lasts for a long time, which results in a great percentage unemployment. Taking into account that inflation would not exceed real wages if nominal wages did not change, Keynesians claim that, to some extent, inflation can help labor markets balance more quickly.

One of the most common means of control the money supply is the possibility of establishing a rate fixed discount, which banks must use to request a loan from the central bank; On the other hand, open market operations can also be carried out, that is, the central bank intervenes in the bond market to impact nominal interest rates. When an economy is going through a crisis and sees a drop in its nominal interest, there comes a point at which the bank cannot reduce rates further, since they would become negative numbers, and this phenomenon is called liquidity trap. Again, a certain degree of inflation tends to ensure that these values ​​do not approach zero, offering banks the possibility of reducing them when they need it.

As the history of certain countries shows, a high degree of inflation can lead to rapid economic expansion. One of the reasons for this is that financial-type investments see their net yield (obtained by subtracting inflation from nominal interest) decrease considerably, which makes investments more tempting. investments non-financial. Furthermore, it is important to note that anti-inflationary measures have been shown in more than one case to negatively affect the economy, as can be seen in the decline suffered by Brazil in 1996 and South Africa in 94.