We constantly hear about the issue of inflation. Especially in 2022, inflation has become a problem that is grabbing the headlines of all newspapers.
But this is not a problem only of the year 2022. In many countries, inflation has been a recurring problem in the economy. Others have had episodes of significant inflation in periods of their history due to the economic policies adopted.
Knowing how complex inflation is and the interest it arouses in many today we will tell you what the dreaded inflation is about and what produces it.
Without more to add let’s start.
What is inflation and elements that produce it?
In simple terms, inflation is the generalized price increase.
To be a little more precise, inflation is an economic phenomenon that describes the sustained and general increase in prices in a particular market.
This means that, limiting it to a particular market, inflation can be local, regional, or global. Price increases are measured in a specific geographical and political area and depend on the economic policies that are developed in this area.
That is why it is so important that the rulers understand inflation to control it. However, we often find ourselves with rulers who apply economic policies that demonstrate the absolute ignorance of this situation.
That is why today we will talk about the fearsome inflation and the elements that can condition its behavior.
Is inflation good or bad?
Inflation is a phenomenon that in small quantities can be beneficial to the economy and competitiveness, but in large quantities creates instability in the economy.
Small doses of inflation promote that money remains invested to compensate for the loss of value. This promotes investment, business, and productivity.
However, high inflation devalues the money people earn, keeps moving and discourages saving. It can begin to promote capital flight to other currencies that do not lose value.
So, a little inflation is healthy (from 0 to 2%), a lot is a scourge for the economy. High inflation can end up in an inflationary spiral, which we will see below.
What is an inflationary spiral?
The expectation of rising prices can cause a phenomenon known as an “inflationary spiral.” An inflationary spiral is a situation in which all market players increase prices in anticipation of future price increases. This in turn causes further price increases.
It is a factor that has a component in the forecasts, budgets and expectations of businesses and people.
That is, inflation can cause more inflation. How we view inflation is a complex phenomenon that feeds itself.
Example of elements that produce inflation: Oil and Russia’s invasion of Ukraine.
Not all price increases are the product of inflation. But there are price increases that are inflationary, because they affect all products, or a wide range of them.
This is the case with the price of oil that when it rises, usually causes an increase in inflation. This is because oil is a raw material that is used in the production of fuels, lubricants, fertilizers, and plastics. Fuel is necessary for the transport of goods and in electricity generation, affecting almost all products and household expenses.
On the other hand, plastic, a derivative of petroleum, is a widespread raw material, affecting the costs of many products. Finally, fertilizers are used in the agri-food industry, and are fundamental to the price of food.
Therefore, any factor that causes the increase in oil prices produces inflation, and this is where the Russian invasion of Ukraine comes in, as we will see below.
The Russian invasion of Ukraine and inflation.
Russia is one of the largest oil exporters. Sanctions that seek to curb the war are affecting the availability of agricultural products, fertilizers, and oil worldwide.
Ukraine is also a large supplier of fertilizers and cereals worldwide. The war also restricts the production and movement of goods, from countries that are large producers.
Restrictions on the supply of oil, cereals and fertilizers drive the prices of raw materials needed for various key sectors of the economy. This is dangerously boosting inflation, jeopardizing the stability of the world economy.
Inflation, basic elements that produce it.
Knowing this, we will proceed to analyze in detail what are the main elements that produce inflation.
As we discussed, inflation is a complex phenomenon. The elements that can drive inflation are varied, and these elements are interconnected. Below, we’ll point out the basic elements that drive inflation and its relationships:
1. Increase in prices of basic inputs.
There are inputs that are basic for the industry because of their broad impact. In the previous video we mentioned oil, necessary to produce fuel, plastics, lubricants, and fertilizers.
There are also other inputs that can greatly impact prices. One of them is the fertilizers or components that are used for its manufacture. This component affects food production and food prices.
Energy and water are usually other inputs that if their price is affected affect prices throughout the supply chain.
If we consider that labor is an input of the productive chain, raising wages without considering productivity can induce inflation.
Inflation, an ally of care that we must control
As we mentioned, keeping inflation low is healthy for productivity. On the other hand, excessive inflation causes the economy to become unbalanced and scares away savings and investment.
We must aim to improve the ways of controlling inflation and for this we need knowledge.
For this reason, Gustavo Mirabal Castro promotes financial education so that we can take charge of our personal finances. To grow in the good times and cope well with the difficult times. Financial knowledge can also help us anticipate situations of risk for our assets and anticipate.
We can follow Gustavo Mirabal to prepare for a better future with financial knowledge that will help us achieve financial freedom.
La entrada What is inflation and the elements that produce it? se publicó primero en Gustavo Mirabal Castro.