Inflacion Economico

Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is that the value of your money is going down and it takes more money to buy things. Therefore a 4% inflation rate means that the price level for that given year has risen 4% from a certain measuring year. The inflation rate is determined by finding the difference between price levels for the current year and previous given year. The answer is then divided by the given year and then multiplied by 100. To measure the price level, economists select a variety of goods and construct a price index such as the consumer price index (CPI1). By using the CPI, which measures the price changes, the inflation rate can be calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by 100.

There are several reasons as to why an economy can experience inflation. One explanation is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises. Inflationary pressures are a supply-demand imbalance that causes the rise in prices in a market or markets. Inflationary pressures may be of several types: monetary, fiscal, cost, etc... Propagation mechanisms make these price increases were passed on to other markets and repeat over time, allowing inflation to remain, even after they have gone the imbalances that led to it.

 Monetary inflation

When faced with a monetary inflation the money supply grows at a rate exceeding the rate of growth of money demand. The main theoretical basis of those applying this theory is the quantity theory of money.

 Monetization of government deficit

When the government runs deficit, can finance it by borrowing, reducing international reserves, or printing money. From the standpoint of governmental accounting printing money to finance the deficit is a loan from Central Bank

 Inflation Demand

Demand inflation corresponds to the demand for goods and services in an economy are greater than the supply thereof. The demand may come from various sectors and for different purposes:

1. On behalf of the families: final products and services, or goods and consumer services;

2. On the part of companies to expand their production capacity, or investment;

3. On the government side, which can be either productive investment expenses not directly, increase the overall supply of the country;

4. On the part of the external sector (exports)

 Cost Inflation

Since the final price of goods and services is closely related to costs incurred in production, an increase in costs will generate an increase in their final price. To analyze the causes of rising production costs, it is useful to group the inputs used in categories. Thus we have the inputs used to produce goods and services can be grouped into

1. Labor;

2. Raw materials that can be international commodities such as oil or grains, or commodities whose prices are set in international markets;

3. Machinery, which can also be produced locally or imported;

4. Services, for example, transportation, which in turn strongly dependent on the price of oil

A second explanation involves the deficit of the federal government. If the Federal Reserve System2 expands the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit having more of an impact on output and employment than on the price level.

A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay.

The fourth explanation is the wage-price spiral which states that no single group is to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger price hike, the rate of inflation continues to rise.

Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP.

The most immediate effects of inflation are the decreased purchasing power of the dollar and its depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destabilizing effect is that inflation can cause consumers and investors to changer their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods which mean that loans made earlier are repaid later in inflated dollars.

Inflation occurs when the value of money begins to fall, thereby decreasing purchasing power.

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