Inflation sample essay

Inflation is an inevitable property of any economy in the world. In simple words, inflation is the rise of general level of prices. However, inflation is a much more complex phenomenon than simply the increase of prices. Inflation (or general inflation) is also identified with the fall of market value of money within a particular economic system. However, some economists prefer to use the term inflation to describe a rapid increase in money supply in a single economy. Generally, this is the main cause of the increase of prices. “There is no opinion better established, though it is seldom consistently maintained, than that the general scale of prices existing in every country, is determined by the amount of money which circulates in it,” wrote Thomas Joplin in his writing Views on the Subject of corn and Currency in 1826. Later in the paper I will use the term inflation to refer to increase of prices, and not the increase in money supply (unless specified otherwise).

The first reaction to the term inflation is in most cases negative, however inflation is an indicator of a healthy economy. Generally, mild inflation is a natural phenomenon of any economy, no matter how strong and stable it may be. Some economists say that small steady inflation is “greasing the wheels of commerce.” One of positive effects of mild inflation in a separate economy is that it is easier to adjust some relative prices (for example salaries). Renegotiating these prices downward is much more difficult. Moreover, some sectors might suffer immensely from constant price level because of so-called “sticky downward” prices that effect those sectors. So in an attempt to acquire zero inflation, employment and profits in such sectors would drop. In addition, stable prices and zero inflation rate might trigger deflation (general decrease in prices), which in turn would entail recession, bankruptcy, and can even entail depression.

The time value of money market expression is inseparable from inflation. From a particular point of view, inflation can be understood as a valid reason to invest money rather than save it. The value of accumulated wealth would gradually decrease because of inflation, which explains the expression above. Moreover, there is a degree of uncertainty regarding what the actual value of a particular currency would be in several years. Because of this uncertainty, investing is a correct activity.

While moderate and mild inflation is considered an indicator of healthy economy, inflation above these mild levels is considered to have a negative impact. As the government increases the money supply, and therefore the taxes, people are willing to spend more money. With the growth of inflation, tax rates grow as well, and so people are even more willing to spend the money for two main reasons: to avoid paying taxes on holding currency, and to buy products before they increase in price. Hence, in such economic conditions the demand for various goods is rapidly growing, which naturally causes the rise of prices. This collection of phenomena reinforces inflation, increases the velocity of money, and it is referred to as the vicious circle. This process is very difficult to harness, and in vast majority of cases it leads to hyperinflation.

Below are some of the properties and consequences of high inflation rate and hyperinflation... As the prices go up, the value of money goes down, and the uncertainty increases. This increase discourages investments and savings, and encourages purchasing (which is only greasing the vicious circle). Unfair money redistribution will occur. Those people who earn money on fixed incomes will receive the same amount, which is actually worth less, while the ones on a more flexible incomes will keep in pace with inflation. This way, money will be redistributed from those on fixed incomes to those on flexible incomes. An example of a person on fixed income is a pensioner, and an example of a person on a flexible income is any entrepreneur or someone in commerce. The same way the wealth is redistributed from creditors to debtors (provided a fixed amount is lent). Often the government is in the role of a net debtor, and so some economists consider inflation can be viewed as inflation rate. Exchange rate with other countries will be greatly undermined by the misbalance of international trade, in case internal inflation rate is higher than abroad. Some less significant negative impacts include the real costs imposed by an attempt to hold as less cash a possible. These costs include driving expenses, depreciation, and other. In addition, some enterprises will have to update their documents, databases, and actual prices, which is costly. Generally, hyperinflation can get out of control, which would hurt nation’s economy very badly.

Some economists believe that inflation should be viewed as stealing the money from the citizens of a country by its government. In any case, government can quell the inflation rate unless it has gone too far. But if the government is procrastinating with immediate actions, justifying itself with “valid” reasons, this is with a 99 percent probability an indicator of stealing money. Of course, the government does no t intend to pay the money back. Moreover, there is absolutely no chance that someone can stop or fight this mass fraud. The reason for such a safe one-way borrowing is that government is the only entity that controls money. When government increases money supply, this new money has no value, but rather is “mere printed paper with no intrinsic exchange value” (Abelard, 2000).

Another way to look at inflation is that it is an increase of the quantity of money in relation to the trade of goods in a society. Inflation is a global phenomenon of the twentieth century, particularly the post World War II era.

Fortunately, inflation is a stoppable process unless it has gone too far. There exist several methods that can be implemented to stop inflation. The Federal Reserve of the United States influences inflation rates by implementing different monetary policies, and by setting bank interest rates. Generally, Central (or National) Banks all over the world fight inflation by decreasing money supply, and by setting high interest rates. In addition, governments can institute wage and price controls (referred to as income policies) to fight excessive inflation rates. However, this method has several negative outcomes; price control distorts the overall functioning of nation’s economy because it encourages decreases in products’ quality, shortages, etc.

In general, inflation is a natural phenomenon, which a healthy economic system must experience at all times. Zero inflation rate, as well as too high inflation rates, are, however, harmful to an economy. The main sign of inflation is the increase of prices, which is in the majority of cases caused by the increase in money supply. Government is the only entity that is responsible for inflation, and it can control inflation rates by imposing specific policies. When government does not impose them, it is involved in stealing money from its people.

Bibliography

1. Inflation. 2005. Wikipedia the free encyclopedia. Website: http://en.wikipedia.org/wiki/Inflation

2. Silkos, P. Inflation and Hyperinflation. 2000. Laurier Canadian Excellence. Website: http://info.wlu.ca/~wwwsbe/ faculty/psiklos/papers/oup.PDF

3. Money and Value. 2000. Abelard. Website: http://www.abelard.org/inflation.htm
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