A surge in inflation and its effects on the economy in 2024
The surge in inflation is one of the major problems affecting individuals’ lives. In this in-depth article, we will discuss the causes of inflation, its extensive impacts, and strategies to mitigate it. Let’s thoroughly explore this highly relevant topic.
What is a surge in inflation?
Inflation is defined as the continuous increase in the general level of prices for goods and services in a country, measured as a percentage change annually. Simply put, inflation means that the prices of things go up over time. This reduction in purchasing power means every dollar you own can buy a smaller percentage of goods and services over time.
In recent years, many developed countries have been trying to maintain an inflation rate of 2 to 3% using various monetary policy tools based on their central bank’s strategies.
How did inflation start in the world?
The concept of inflation was first used in European economies, specifically during the modern history of Europe. It was utilized as a measure of consumer prices during the industrial revolution. Inflation meant determining average prices distributed over food items. This term spread significantly throughout the economic sectors in Spain, England, and Brussels, as the exchange rate index of currencies in these areas observed a noticeable increase, leading to economic imbalances.
Types of inflation surges
Authentic inflation:
This type of inflation 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 larger amount of currency, leading to an increase in the prices of consumer products in the market.
Demand-pull inflation:
This inflation leads to an increase in prices due to excess demand for goods and services, clearly shown by comparing different prices between locally made and imported products. This type of inflation may appear temporarily or continue for a long time and often includes basic food commodities and holiday season excursions.
Cost-push inflation:
This type of inflation begins gradually as production rates decline, resulting in less availability of goods and services. This results in a gradual increase in their prices due to the increased purchase of goods for storage, leading to a halt in production growth.
Imported inflation:
This 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:
This inflation appears after the government increases the money supply due to public expenditures, which subsequently lead to higher prices for services and products in the market. Hence, the government intervenes to set a price ceiling, controlling buying and selling operations.
Causes of inflation surges
Although there is no single theory universally agreed upon about the causes of inflation, several hypotheses indicate various factors contributing to inflation, including:
Cost-push inflation:
This type of inflation 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.
Demand-pull inflation:
This inflation results from an overall increase in demand for goods and services, leading to higher prices. This theory is often summarized as ‘too much money chasing too few goods.’ In other words, if demand grows faster than supply, prices will rise. This scenario typically occurs in fast-growing economies.
Monetary inflation:
This type of inflation surge results from an increase in the money supply in the economy. Like any commodity, the prices of things are determined by supply and demand. If the supply exceeds demand, the prices will decrease. If the commodity in question is money and there is an abundance of it, the value of that money will decrease, causing the prices of all items priced with that money to rise.
Inflation theories
Many economists have studied the phenomenon of inflation, formulating various theories to understand it. The most prominent include:
Quantity Theory of Money:
This is one of the oldest theories regarding inflation, which posits that prices are based on the monetary value of an economy. It assumes a specific amount of money must be maintained by people for their daily expenses, such as buying necessities and paying bills. The economic thinker David Hume first introduced ideas related to the Quantity Theory of Money in the 18th century. He proposed that the ability to produce should match the amount realistically allocated for consumption. However, the practical application of these ideas was interrupted by the outbreak of world wars.
Keynesian Theory:
Formulated by economist John Maynard Keynes, this theory suggests that individuals tend to consume from their additional earnings, generally affecting income levels. This theory helps predict spending patterns on goods and services. Additionally, it contributes to the study of economic activity and investment levels, especially in industrial fields, providing necessary control over financial indicators.
How to reduce inflation?
Reducing a surge in inflation can be achieved through various means, which include:
- Addressing the direct and indirect causes of inflation on a large scale using financial and monetary policies and strategies.
- Promoting equilibrium in the exchange rate to limit excess money issuance and price increase.
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