Inflation Economy Experts Have Not

Inflation

Economy experts have not agreed upon a generally accepted definition of inflation. Opinion on how inflation is generated and how it manifests are numerous, determining the existence of numerous definitions. Definition #1: loss of purchasing power of money caused by growth of the amount of money in circulation and reflected in a rise of prices without a proportionate increase in value of the things purchased (Webster's, 2008). Definition #2: a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services (The American Heritage Dictionary, 2008). Definition #3: the overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index (InvestorWords, 2008). The working definition that will be used in this paper is represented by the definition provided by the American Heritage Dictionary. Inflationist processes represent realities that create the object of preoccupation of all categories of economic agents, of ordinary people, of authorities, and of specialists. Inflation is a component of everyday life and of the economy's functioning mechanism. As an economic phenomenon, inflation is perceived as a general increase of goods' prices and a reduction of the monetary unit's purchasing power. Even if the prices do not increase in absolutely all categories of goods, the process is still present in the great majority of goods. There may be increases in certain categories of goods that do not necessarily represent the expression of the inflationist process. For example, certain goods may experience an increase in their intrinsic quality that consumers perceive. In other cases, temporary shocks, smaller or more important, may intervene on the market's equilibrium or on the supply and demand of certain goods. After a short period of time the causes that have generated the shock disappear, and the effect is eliminated, prices returning to their previous level. Despite these delimitations, inflation has manifested intensively or intermittently for dozens of years. After World War II, inflation became a persistent reality, durable, but with different intensity in every economy: rebel, extremely dynamic, causing worries in underdeveloped economies, or slow, kept under control in modern economies. Inflation is a macroeconomic unbalance between money and goods. Although inflation is perceived by economic and social participants with different intensities and meanings, there are institutionally established formulas for calculating its level and evolution. The generally accepted index for calculating inflation is the Consumer Price Index (CPI). In the United States, for calculating the CPI specialists take into consideration 364 different categories of goods produced by 21,000 companies in 91 geographical areas. In October, the CPI decreased 1% (BLS, 2008). Inflation is a complex economic phenomenon that has generated numerous debates between experts, and preoccupations for practitioners and the population regarding the causes that generate inflation and the mechanisms that support it. There is currently no generally accepted theory of inflation. The causes of the inflationist process are numerous, including economic, psychological, social, political, internal, and external causes induced through the international economic relations mechanism and through the increasing interdependencies between national economies. In certain conditions, inflation is generated by the demand, and in others it is generated by the supply. In some cases, inflation has been determined by the contradictory evolution between the supply and demand, or by monetary politics measures that were insufficiently correlated with economic realities. Unjustified increase of financial incomes of certain categories of economic agents, state budget deficits, increased costs, depreciation of the national currency, or the reduction of supply with no economic foundation can determine, amplify, and maintain the inflationist process. However, the essential feature of modern inflation is the fact that it has an internal dynamics and that it is difficult to stop once it has emerged. Experts call this inertial, anticipated, or fundamental inflation. This type of inflation is anticipated by economic agents and taken into consideration when signing private contracts and official agreements. Therefore, given the fact that it is integrated in the economic actions and behaviors of individuals and officials, the anticipated inflation rate can be taken into consideration for the future effective inflation rate that has the tendency to last for as long as a shock will not determine it to increase of to diminish. There are numerous partial causes that combine and generate the inflationist process, as an unbalance between money and goods, consisting in excessive monetary supply in relation with the volume of goods subjected to transactions. Basically, this situation reflects the existence of a total demand excess in relations with the total supply, an unsatisfied solvable demand. From the perspective of the processes that determine it, inflation is traditionally segmented as: inflation through demand, inflation through costs, structural inflation. All these cases are characterized by a supplementary global demand exceeding the global supply, but with different explanations in each of these inflation types. They are identified by a specific evolution of the GDP. The GDP usually increases in the case of inflation through demand, it diminishes in the case of inflation through costs, and it can be stationary or it can follow a reduction tendency in the case of structural inflation. Inflation through demand is based on an increase in the global demand that takes place suddenly or gradually in combination with an inelastic supply. In other words, when demand increases as a result of a certain shock, the price and quantity increase, because the balance must adapt through prices and through quantities. The premise of the inflation through demand is that the monetary mass increases faster than the GDP, or that the incomes of economic agents increase more intensely than the goods supply. Considering these aspects, Milton Friedman stated that the inflation is always a monetary phenomenon, the root of this phenomenon being the monetary excess. In order to have an inflationist process, two main conditions are required: the general increase of prices, and its long duration. The circumstances that determine the length of this process are numerous. They depend mainly on intentional mechanisms designed to repeatedly more money than necessary. This situation generates supplementary solvable demand, which means that increasing prices is the immediate solution for balancing the markets. The elasticity of production, especially production of durable goods and capital, is decisive for the inflation state. If the supply is elastic, the indirect mechanism will not generate inflation. If the production is inelastic, it means that the inflationist process has emerged. Another factor responsible for generating or preventing the inflationist process is represented by the economic agents that gain the excessive money supply in circulation. If the money supply increase would go to producers, it means the investments are stimulated, GDP increases, and the possibilities of the inflationist process are reduced. If the money supply increase would go to consumers and speculators the prices increase effect is inevitable and the inflationist process emerges. The inflation through costs is based on the connections that exist at costs level, the behavior of entrepreneurs, and the efficiency of using resources. The working hypothesis is that the level of unitary costs receives a growth impulse. The causes are numerous: depreciation of the rate exchange, which increases the prices of imported production factors, favoring the CPI increase, the reduction of certain markets. Inflation through costs can also emerge because of governmental policies, when the government is interested in maintaining a high demand, by practicing expansive monetary and fiscal policies. This way, the global demand that is artificially supported by the authorities, increases potential production, which leads to inflationist reactions of entrepreneurs. The structural inflation assumes a severe economic situation in which demand and supply modify in contradiction: demand increases, and supply decreases. Although it can be considered a continuation of the previous types of inflation, the structural inflation also has specific components: the existence of powerful monopolist, oligopoly, and bureaucratic administrative structures that have the ability to stimulate certain components of the global demand, while reducing certain elements of the global supply. Conclusions There is no generally accepted theory of inflation. The causes that generate it are numerous and include economic, psychological, social, political, internal, and external factors. Inflation is based on numerous partial causes, which correlated determine the inflationist process. Inflation is generally considered an unbalance between money and goods, consisting in the existence of excessive money supply in relation with the volume of goods subjected to transactions, resulting an excess of unsatisfied total demand. Given the processes that determine it, inflation can be generated through demand, supply, or it can be structural. Inflation can be generated by a global demand increase, if the supply is inelastic. The money supply increases faster than the GDP, causing inflation.