GLOBAL INFLATION 1

GLOBAL INFLATION : How Global Inflation Has Become a Social Problem

M.A.I Santhuka Rupathunga (9252)

American National College - SOC 3000

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GLOBAL INFLATION : How Global Inflation Has Become a Social Problem

Price increases, or inflation, may be thought of as the gradual loss of buying power. The

average price rise of a selection of products and services over time can serve as a proxy for the

pace at which buying power declines. A unit of currency essentially buys less as a result of the

increase in pricing, which is sometimes stated as a percentage. Deflation, which happens when

prices fall and buying power rises, can be compared to inflation. Human requirements go beyond

simply one or two things, even if it is simple to track price changes over time for certain

products. For a pleasant existence, people require a wide variety of items as well as a variety of

services. Commodities like food grains, metal, and fuel are among them, as are utilities like

power and transportation, as well as services like labor, entertainment, and health care. The

objective of measuring inflation is to determine the overall effect of increases in price for a

variety of goods and services. It enables a single value representation of the rise in the cost of

goods and services over time in an economy. As prices grow, fewer products and services may

be purchased with a given amount of money. The general public's cost of living is affected by

this loss of buying power, which eventually slows economic growth. According to economists'

general understanding, prolonged inflation happens when a country's money supply expands

faster than its economy.

When inflation is unanticipated or very high, it may be a concern since it causes economic

instability and makes individuals reluctant to spend money, which slows down economic

expansion. Inflation can also make goods and services costly for people living on fixed incomes.
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Additionally, it can result in financial losses for creditors and harm international trade. The

buying power of the population declines as inflation outpaces wage growth. For retirees and

other people who might have a fixed income, this is especially true. If interest on loans is

calculated without taking inflation into account, creditors might also lose money. When

contrasted to the pricing in other nations, inflation can also reduce the competitiveness of local

product prices. Additionally, when inflation raises the cost of products and services, it costs

firms money to update labels, menus, and other listings. To counteract this, the monetary

authority (like the central bank) implements the appropriate measures to control the money

supply and credit in order to maintain acceptable inflation levels and a healthy economy.

Theoretically, the relationship between inflation and the money supply of an economy is

explained by the popular theory of monetarism. For instance, huge quantities of gold and

particularly silver poured into the economies of Spain and other European nations after the

Spanish conquest of the Aztec and Inca empires. The value of money decreased as the money

supply grew quickly, which helped to fuel the fast rise in prices. Depending on what kinds of

products and services are being purchased, there are several techniques to monitor inflation. It is

the opposite of deflation, which occurs when the inflation rate goes below 0% and represents a

broad reduction in prices. Remember that disinflation, a word used to describe a slowdown of the

(positive) pace of inflation, should not be confused with deflation. (2020)

There are several reasons why prices rise, some of which include:

Inflation is caused by a rise in the quantity of money, albeit this can happen through a

variety of economic causes. The monetary authorities can boost a nation's money supply by:
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 printing additional currency and distributing it to people

 legally depreciating (decreasing) the value of the money that is legal tender

 acquiring government bonds from banks on the secondary market in order to create fresh

money as reserve account credits through the banking system (the most common method)

In each of these scenarios, the money ultimately loses its ability to buy things. Three

different sorts of inflationary processes may be identified as a result of this: demand-pull

inflation, cost-push inflation, and built-in inflation.

Demand-Pull Effect

Demand-pull inflation is when the economy's total demand for goods and services rises

more quickly than its ability to produce them. This happens when the availability of money and

credit increases. This raises demand, which causes price hikes. More money leads to happier

consumers since more individuals have more money. Consequently, more money is spent, which

raises prices. Higher demand and a less adaptable supply lead to a demand-supply mismatch,

which raises prices.

Cost-Push Effect

Cost-push The rise in prices affects the inputs used in the production process, which

leads to inflation. Costs for all types of intermediate products increase as more money and credit

are directed toward the commodities or other asset markets. This is particularly clear whenever

there is a bad economic shock that affects the supply of important goods. These changes drive up

the price of the final good or service, which in turn drives up consumer pricing. For instance,

when the money supply is increased, oil prices experience a speculative boom. This implies that
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the price of energy may increase and affect consumer prices, which are represented in various

inflation indices.

Built-in Inflation

Adaptive expectations, or the notion that individuals anticipate present inflation rates to

persist in the future, are connected to built-in inflation. People may anticipate an ongoing

increase at a similar pace in the future as the price of products and services grows. Workers may

therefore request higher expenses or wages in order to maintain their level of living. The cost of

products and services rises as a result of their increasing earnings, and this wage-price spiral

keeps going as one element drives the other and vice versa.

Rising prices are a common definition of inflation. The rising index number of prices

over time is a sign of it. It represents the economy's state of disequilibrium. Because of price

control and rationing policies used by the government, an inflationary scenario may occasionally

not manifest itself as an increase in the price index. We refer to the two conditions as "open

inflation" and "suppressed inflation" to make the distinction. In an open inflation, the

disequilibrium state manifests itself through an increase in price level, but in an inflation that has

been repressed, the extra-market force balances out the disequilibrium force. Price increases and

an open inflation would result from the removal of extra-market factors. Therefore, to identify

the factors causing the presence of economic disequilibrium, we must investigate the origins of

inflation. The simple absence of inflation does not imply the presence of price stability.

Government action may be necessary to force price stability. As long as the aggregate supply and

demand are equal, the price level is in equilibrium. The overall aggregate supply and demand

may be equal, but certain requests may be higher than their corresponding supplies and some

needs may be lower than their corresponding supplies. If all prices were flexible, the overall
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level of prices would remain unchanged; only the relative pricing would fluctuate. Even though

the aggregate supply and demand are equal, an inflationary scenario might develop if prices are

only adjustable in the upward direction. In that case, prices are likely to be raised by forces of

excess demand where they exist but not lowered by forces of surplus supply in other areas. Thus,

an inflationary condition in the economy arises from the downward inflexibility of prices in the

face of surplus supply—combined with the existence of excess demand in some sectors.

"Structural inflation" is the name given to this kind of inflation.

When manufacturing costs grow, there is an inflation of prices. The price of labor, raw

materials, and other factors can all increase the cost of production. The cost of production will

grow if the pay rate does, assuming that labor is the sole variable element in the near run. As a

result of an increase in pay rates, cost inflation may develop. Two things might cause wage rates

to rise:

(1) As a consequence of pressure from labor unions or collective bargaining,

(2) A rise in the need for labor.

Because it is a situation of demand inflation where the inflationary pressures originated

in the factor market, if the pay rate rises as a result of increasing demand for labor, it should not

be viewed as cost inflation. Even when there is not an excess demand for labor, pay rate hikes

must be the result of pressure from trade unions for there to be actual cost inflation. By assuming

that the pay rate is not market-determined, or that the dynamics of supply and demand have no

bearing on wage determination, a theory of cost inflation may be established. Demand inflation

occurs when there is too much demand for goods on the market for their production, and too

much demand on the labor market causes an increase in wages. The oversupply of commodities
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drives the oversupply of labor in the labor market. Contrarily, in the case of cost inflation, the

pay rate increases independently of the labor market's surplus demand while commodity prices

increase in response to the output market's excess demand. Thus, the following series of events is

required for the hypothesis of a genuine cost inflation:

(a) Without any surplus demand for labor or output, there is an independent growth in the wage

rate.

(b) Changes in output demand and supply occur in response to wage rate increases.

(c) A surplus of demand on the output market causes an increase in commodity prices.

The first logical step in the process is the setting of the pay rate in collaboration with

the trade union. Let's imagine that, in the absence of a surplus demand for labor, the trade union

requests a higher wage rate and that the pressure from the trade union forces the employers to

comply with the higher salary demands. A boost in productivity may occur after a higher pay

rate, but if the wage rate increase outpaces the increase in productivity, the wage rate increase

stands alone. As a result, the labor expense per unit of output increases. The process of

examining how the increase in pay rates would affect supply and demand is the second phase.

We now need to be aware of the resulting changes in output supply and demand. If the

employer's primary goal is to maximize profits and the law of diminishing returns applies to

labor, an autonomous increase in the pay rate will result in a decline in output and employment.

The ensuing shift in aggregate demand is dependent on changes in the income distribution as

well as the marginal propensities of employers and employees to spend. The income of the

workers will rise if the elasticity of labor demand is less than one. When wage income increases,

worker spending increases, employer spending decreases, and profit revenue decreases. The total
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amount spent will increase if the marginal propensity to spend of the profit-earners is smaller

than that of the workforce. In the contrary scenario, it will crumble. The expenditure of the

businesspeople decreases but the expenditure of the employees does not while the total wage

income is constant. The total spending decreases as a result. Another approach to look at the

problem of cost inflation is to assume that excess demand is what is causing it, but that the

involvement of the trade union may be what causes wage rate determination and the spread of

inflation across the whole economy. (Mehta, 2015)

Depending on which side one takes and how quickly the shift happens, inflation can be

viewed as either a positive or a negative thing.

Pros

 People who own physical assets, such as real estate or stocks of commodities, may

benefit from inflation since it will increase the value of their possessions, which they may

then resell for more money.

 Due to the expectation of higher returns than inflation, firms and individual investors

frequently speculate on hazardous business ventures as a result of inflation.

 It is frequently encouraged to have inflation at a set level to stimulate spending rather

than conserving. If money's buying power decreases with time, there can be more of a

reason to spend now rather than save and spend later. Spending might rise as a result,

which would help an economy. It is believed that a balanced strategy will keep the

inflation rate in an ideal and acceptable range.

Cons
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 The fact that they will have to pay more money due to inflation may not make buyers of

these assets pleased. People who own assets such as cash or bonds that are valued in their

native currency might not enjoy inflation since it reduces the true worth of their

possessions. Thus, those wishing to hedge their portfolios against inflation should think

about investing in commodities, real estate investment trusts, gold, and other inflation-

hedged asset classes (REITs). Another well-liked way for investors to profit from

inflation is through bonds that are inflation-indexed.

 High and erratic inflation rates may have a significant negative impact on an economy.

When making purchasing, selling, and planning choices, businesses, employees, and

customers must all take the impact of generally rising costs into consideration. This adds

another element of uncertainty to the economy since they run the risk of estimating future

inflation rates incorrectly. It is anticipated that the amount of time and money spent on

studying, estimating, and modifying economic behavior would increase to the general

level of pricing. Real economic fundamentals, on the other hand, invariably entail a cost

to the economy as a whole.

 Even a low rate of inflation that is consistent and simple to anticipate, which some people

would ordinarily consider ideal, can cause significant issues for the economy. This is due

to the manner, setting, and timing of the new money's entry into the economy. Every time

fresh money and credit enter the system, they inevitably end up in the hands of particular

people or businesses. As individuals spend the new money and it moves from hand to

hand and account to account throughout the economy, the process of price level

adjustments to the increased money supply continues.

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 Even a low inflation rate that is reliable and easy to predict, which some people would

typically view as desirable, can have a big negative impact on the economy. This is as a

result of how, when, and where the additional money entered the system. New funds and

credit always find their way into the hands of specific individuals or organizations. The

process of adjusting price levels to the additional money supply continues as people

spend the new money and it passes from hand to hand and account to account throughout

the economy.

The crucial duty of regulating a nation's financial system includes controlling inflation. It

is accomplished through putting policies into effect through monetary policy, which describes

the activities taken by a central bank or other groups to control the amount and rate of expansion

of the money supply. Since the increase in stock prices includes the consequences of inflation,

stocks are regarded as the best hedge against price increases. Since bank credit injections through

the financial system are how nearly all contemporary countries increase the money supply, a

large portion of the immediate impact on prices occurs in financial assets that are valued in their

native currencies, such as equities. (What Is Inflation?, 2022)

The widespread consensus is that both too much and too little inflation are damaging to

an economy. Many economists support a medium ground of 2 percent annual inflation that is low

to moderate. In general, rising inflation is bad for savers since it reduces the purchase value of

their savings. The fact that their outstanding loans' inflation-adjusted values decline over time,

however, might be advantageous to borrowers. The economy may be impacted by inflation in a

number of ways. For instance, if inflation weakens a country's currency, exporters may profit

since their products will be more competitively priced when expressed in the currencies of other

countries. On the other hand, this can hurt importers by raising the cost of items created
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elsewhere. Higher inflation might boost expenditure because people would try to buy things as

soon as possible before their prices continue to climb. On the other side, savers can see a decline

in the actual worth of their assets, restricting their capacity to consume or make investments in

the future.

The U.S. and global inflation rates in 2022 reached their greatest levels since the early

1980s. Although there is no one cause for the sharp increase in global prices, a number of factors

combined to drive inflation to such high levels. Early in 2020, the COVID-19 epidemic caused

lockdowns and other restraints that severely impacted the world's supply lines, causing anything

from industrial closures to traffic jams at seaports. To lessen the financial impact of these

policies on people and small companies, governments offered stimulus payments and expanded

unemployment compensation. The demand for COVID vaccinations swiftly surpassed the

available supply, which was still struggling to reach pre-COVID levels as the disease spread and

the economy quickly recovered. Since Russia is a major producer of fossil fuels, the aggressive

invasion of Ukraine by Russia in early 2022 resulted in a number of trade and economic

sanctions on Russia, which reduced the global supply of oil and gas. Food costs increased at the

same time because Ukraine's abundant grain crops couldn't be exported. Price hikes for food and

gasoline were mirrored farther down the value chains.

Anti-Inflation Policies:

Anti-inflation policies may be grouped as:

(1) Monetary Policy:

The central bank's credit control policy is referred to as the monetary policy.
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The following actions by the central bank can limit the amount of credit:

(a) Open market transactions

 indicates that by selling government securities on the open market, the government

may diminish or completely remove the extra purchasing power. As a result of

purchasing government securities rather than commodities, the general public's

purchasing power will decrease. The amount of money in the economy would

decrease as a result.

(b) Variations in Bank Rate:

 In times of inflation, the bank rate ought to be raised. The increase in the bank rate

will discourage investment by raising the long-term market rate of interest. As a

result, the inflationary gap will narrow.

 Modifications to the reserve ratio that commercial banks must maintain with the

central bank. During the inflationary phase, the reserve ratio of the commercial banks

will need to be raised. When the reserve ratio is raised, this will lessen the

commercial banks' surplus reserves and, as a result, lessen the banking system's

ability to provide credit.

(d) Strict credit control techniques:

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 The selective techniques of credit management, such as regulation of margin

requirements or regulation of consumer credit, may be used to limit credit in some niche

economic sectors. The primary issue with monetary policy is that it only has an indirect

effect. As a result, there would be a delay in seeing the effects of monetary policy. The

sensitivity of various economic indicators to changes in the money supply and the interest

rate also affects how effective the monetary policy will be.

(2) Economic Policy:

Because of these issues with monetary policy, fiscal policy may also be utilized to keep inflation

under control. The government's taxes and spending plans are referred to as its fiscal policy. A

number of fiscal factors, including changes in tax rates, changes in government borrowing, and

changes in government spending, including transfer payments, can have an immediate impact on

aggregate demand. It may take the following actions during the inflationary period:

 Government spending can be cut, which will lower total demand because it makes up a

portion of total demand.

 Taxes should be raised while keeping government spending the same. Tax increases will

decrease disposable income, which will decrease consumption spending. It should be

mentioned that direct taxes are preferable to indirect taxes for fighting inflation. The

application of indirect taxes will result in a rise in the price level since the effects of

indirect taxes can be changed.

 During an inflationary environment, the government should sell bonds to the general

population to borrow money. When consumers purchase bonds, they give up purchasing

power that could have been used for investments or consumption.

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Thirdly, non-financial policy:

Non-monetary policies may also be implemented to regulate the inflationary situation

in addition to monetary and fiscal measures. Other than limiting demand, income policies have

been the anti-inflationary strategy that has been employed most frequently. It covers a broad

variety of measures, from the government's establishment of voluntary recommendations for pay

and price rises through consultations on wage and pricing norms between labor unions, business,

and the government to mandatory limits on wage, price, and profit increases. These are

essentially interventionist policies that call for government action to change the outcomes that

would have otherwise resulted from negotiations between the commercial and public sectors.

Throughout all kinds of situations, income policies have been utilized in Europe. Along with

production adjustments and rationing, other non-monetary strategies could also be used. A lack

of output might lead to inflation. Consequently, the output level should be raised in real terms in

order to limit inflation. In reality, rationing and price controls are short-term strategies. Setting a

legal maximum price for an item is price control. Simply controlling prices, though, may result

in the emergence of a black market if demand cannot be restrained. Rationing serves as a tool for

maintaining consumer price stability and ensuring distributive fairness. Rationing, however, may

cause corruption and the black market due to a poor management. Anti-inflationary measures

should not be compared as competitors. All of them should be used together to get the best

result.

According to the Bureau of Labor Statistics, the overall Consumer Price Index (CPI),

a gauge of inflation at the retail level, accelerated in February and increased from 7.5 percent in

January to 7.9 percent annually. The rate of inflation in February was the highest it had been in

40 years. Core inflation, which does not include increases in the price of food and energy,
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increased at a slower rate in February (6.4 percent), indicating that these increases have been

driving inflation higher. According to the Labor Department, increases in the indexes for food,

housing, and fuel were the biggest factors in the increase in the seasonally adjusted total. "Other

energy component indexes were mixed in February, but the gasoline index increased by 6.6

percent, accounting for nearly a third of the monthly rise in all categories. Both the food index

and the food at home index had their highest monthly rises since April 2020, rising by a

combined 1% and 1.4%, respectively. (AFP News, 2022)

With the aforementioned information, it is clear that as food and energy costs continue

to grow globally, inflation is becoming a global phenomena. Rising global inflation threatens

consumer spending, the largest contributor to each nation's GDP, and causes analysts to express

grave worries about the viability of the global economic recovery from the pandemic recession.

REFERENCES

AFP News. (2022, March 10). Putin Says Sanctions Will Disrupt Food, Energy Markets.
International Business Times. https://www.ibtimes.com/putin-says-sanctions-will-
disrupt-food-energy-markets-3432660
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Mehta, P. (2015, September 7). Social Costs of Inflation: An Overview. Economics Discussion.
https://www.economicsdiscussion.net/inflation/social-costs/social-costs-of-inflation-an-
overview/11628
S. (2020, April 4). Why Is Inflation a Problem? Reference.Com.
https://www.reference.com/world-view/inflation-problem-e8235d67ade5eeed
What Is Inflation? (2022, July 16). Investopedia.
https://www.investopedia.com/terms/i/inflation.asp