• Mya Chew

Inflation

Have you noticed that the things around us are getting more and more expensive? Let us look at our breakfast foods, for example. The price of cereal has gone up 0.2%, yoghurt has gone up 6.2%, and bacon has gone up a whopping 10.7%.[1] When we look at all these foods, inflation becomes very apparent. Inflation is defined as the persistent increase in prices. This is bad news for us because it means that our purchasing power is slowly diminishing.


There are two types of inflation: cost-push inflation and demand-pull inflation. Cost-push inflation happens when prices are forced upwards by a sustained increase in production. This could be a result of factors such as tax-push inflation or profit-push inflation. On the other hand, demand-pull inflation occurs when aggregate demand exceeds aggregate supply. This could be a result of increasingly scarce resources that cause consumers to bid up prices.


However, inflation is not always a bad thing! A mild to moderate inflation is sought after by economies around the world. This is because the mild inflation is an indication that the economy is healthy, and its gross domestic product is growing. However, hyperinflation and galloping inflation are alarming because inflation increases become uncontrollable and unpredictable. Such volatile inflation rates can damage the way a capitalist economy operates. Venezuela is currently facing hyperinflation; its inflation rate is at 5500% compared to 2020.[2] Heavy money printing and deficit spending by the government has been seen as the key culprits for Venezuela's inflation woes.


However, there are other looming problems concerning inflation that the world is concerned about: an inflationary spiral and stagflation.


An inflationary spiral happens when the sustained increase in prices is being fed by wage increases and cost increases. This starts a vicious cycle. When demand-pull inflation occurs, the general price level rises, and workers will most likely negotiate for higher wages to sustain their quality of living. This ends up increasing the cost of production for companies, especially those that heavily rely on labour resources to produce their goods and services. Consequently, this will cause cost-push inflation and general price levels will rise even higher. The whole cycle will repeat itself, leading to an inflationary spiral.


Earlier in this article, it was mentioned that moderate inflation is usually a sign of a growing economy. However, when there is inflation while the economy does not grow, it is known as stagflation.[3] Economists are warning that we could see another period of stagflation, like the crisis in the 1970s of high inflation together with the low output from the economy. Today’s loose monetary and fiscal policies combined with negative supply shocks point the way towards stagflation. Low economic growth and high inflation rates are two very undesirable situations for an economy.


With the COVID-19 pandemic raging across the globe, rising inflation seems even more inevitable as governments try to pump money into their economies to help them stay afloat. Is it only a matter of time before we see whether governments and central banks can control inflation and prevent it from overwhelming their already fragile economies?


References:

[1] Wall Street Journal “What your breakfast can tell you about inflation”

[2] https://www.statista.com/statistics/371895/inflation-rate-in-venezuela/

[3] https://www.channelnewsasia.com/news/commentary/stagflation-warning-signs-debt-great-depression-roubini-banking-15131474

 
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