Is A Surge In Inflation A Problem That Threatens The Economy?

A surge in inflation and its effects

The surge in inflation is one of the major problems affecting individuals' lives, but in our article today, we will discuss all its causes and all the details that pertain to this topic.

Surge in inflation

The surge in inflation is defined as the continuous increase in the general level of prices for goods and services in a country. It is measured as a percentage changing annually. It also means that the prices of things go up over time. 

In other words, inflation means that every dollar you own can buy a smaller percentage of goods and services, as when prices go up, the value of the money you own goes down.

The value of the money you have is expressed by its purchasing power, which means the actual amount of goods or services you can buy at a given time.

For example, if inflation is 2% on an annual basis, any good worth $1, say, Simon, is worth $1.02 in a year. After inflation, the dollar will not have the same value in the past, as the price of that commodity in the past, for example, was $ 0.05, which means that prices have risen or, in another way, the value of the dollar has decreased.

In recent years, many developed countries have been trying to maintain the inflation rate to a range between 2 and 3% using monetary policy tools based on central banks.

How did inflation start in the world?

The concept of inflation was used for the first time in European economies; Specifically, in the modern history of Europe, it was used as a measure of consumer prices during the industrial revolution. Inflation was a means of determining average prices distributed over food items. The term inflation spread significantly in the economic sectors in Spain, England, and Brussels; As the exchange rate index of currencies in these areas was equal to the purchasing power before, it showed a noticeable increase, which led to an imbalance between the economic indicators, and this matter was called inflation.

Types of a surge in inflation

Authentic inflation:

It is inflation that is also known as normal inflation;  It is produced due to the increase in the population, which leads to an increase in their consumption needs;  Therefore, governments issue a large amount of currency, and this leads to an increase in the prices of consumer products in the market.

Inflation on demand:

Inflation leads to an increase in prices due to the excess demand for goods and services, which is clearly shown by comparing the difference in prices between locally made products and imported from other countries. This inflation may appear temporarily or continue for a long time; It usually includes basic food commodities and holiday season excursions.

The sluggish surge in inflation:

It is inflation that begins in a gradual manner;  As production rates decline, resulting in less availability of goods and services;  This results in a gradual increase in their prices;  Because of the increased purchase of goods for storage, which leads to a halt in production growth.

Imported inflation:

The inflation results from the increase in the prices of imported goods, which subsequently leads to an increase in the prices of domestic goods.

Suppressed inflation:

It is the inflation that appears after the government is keen to increase the money supply;  Because of public expenditures, which subsequently lead to an increase in the prices of services and products in the market;  Therefore, the government intervenes in order to set the upper limit for prices, which contributes to controlling the handling of buying and selling operations.

Causes of a surge in inflation

There is no single theory that has been agreed upon about the causes of inflation, but there are some hypotheses that indicate the causes of inflation, including:

Cost Inflation:

Inflation here occurs when companies' production costs rise. When this happens, companies increase prices to maintain profit margins. Costs can include things like wages, taxes, or increased costs for natural resources or imports.

Inflation caused by demand:

This inflation results from the overall increase in demand for goods and services, which leads to an increase in their prices, and this theory can be summarized in "a lot of money seeks to buy a very small amount of goods." In other words, if demand growth is faster, supply prices will rise, which usually happens in fast-growing economies.

Monetary inflation:

This type of surge in inflation results from an increase in the money supply in the economy, and like any commodity, the prices of things are determined by supply and demand. If the supply is abundant, the prices of that thing will decrease, and if this thing is money and there is an abundance in the supply of it, the value of that money will decrease and cause the prices of all other items priced with that money to rise.

Surge in inflation | Inflation theories

Many economists were interested in studying the phenomenon of inflation, which prompted them to formulate a set of theories that helped to learn it, the most important of which are:

Quantum Theory

It is one of the oldest theories that concerned itself with the study of inflation;  by setting prices based on monetary value;  It assumes a specific amount of money;  which must be kept by the people in order to use it in their daily expenses;  Especially fixed ones, such as: buying basic things, paying consumer bills, and others.

The first ideas go back to the quantum theory of the eighteenth century AD;  Specifically to the economic thinker David Hume, who assumed the ability to produce in proportion to the quantities realistically allocated to consumption, but the application of private ideas in this theory did not continue;  Because of the outbreak of world wars

quantum theory;  By studying the supplied quantities of money and then measuring its trading index to control inflation.

Keynesian theory

It is the theory formulated by the economist John Keynes, which indicates that individuals tend to consume from the additional amounts they get due to their extra work, and generally affects income levels. This theory helps to make a set of predictions about the standards of spending on  Goods and services. The Keynesian theory also contributes to the study of economic activity and investment levels, Especially in the industrial fields, which provide the required control over financial indicators.

How to reduce inflation?

There are several means and methods that help reduce a surge in inflation, including:

Confronting the direct and indirect causes which lead to the occurrence of inflation on a large scale in societies;  Through the use of a set of financial and monetary policies and means that lead to containing inflation.

Ensuring the promotion of equilibrium in the exchange rate contributes to limiting the issuance of money and increasing prices in general.