What is inflation? Causes and results
- Kamila Niemotko
- Oct 30, 2022
- 2 min read
Definition
Let's begin with the simplest definition. Inflation is a process of general increases in the price level of goods and services in an economy that persists for an extended period of time. It is an indicator that tells us about the overall increases and the cost of living in the country. It leads to a decline in the purchasing power of domestic currency – for the same amount of money, we can buy fewer goods. It wreaks havoc in our wallets. In September 2022, inflation in Poland reached 17,2% (GUS data).
The causes
There may be various causes of inflation, such as:
- Too much money in the economy – an excessive emission of money
- A faulty structure of the economy
- Unbalanced budget of the country
- An increase in demand
- A sudden and significant increase in production costs
The results
Inflation is a complicated phenomenon that has a strong influence on plenty of economic processes. A low but positive inflation rate is economically viable, while high inflation is dangerous and always has negative effects in the future. Despite constant nominal incomes, their relative value is lower. The value of savings drops, so people who want to get rid of worthless money start to invest in, e.g. lands and estates.
A few interesting cases of inflation around the world
Venezuela is an example of a country that significantly regressed economically within six years. In 2014 the nominal GDP there was 259 billion USD, but in 2021 the GDP decreased to 44,9 billion USD. In 2017 Venezuela experienced hyperinflation that reached 863%!
Typically, the cause of colossal drops in GDP are wars and other natural disasters. After WWI, Germany had to face HYPERINFLATION written in capital letters. A loaf of bread, which at the beginning of 1923 cost about 200 marks, in November of the same year already cost 200 billion marks. According to Steven Hanke and Nicholas Kruk, price levels in Germany doubled in less than four days. Monthly inflation peaked at close to 30,000%!
For many years, Zimbabwe was considered a symbol of a crazy economic policy. In the first decade of the 21st century, the country struggled with hyperinflation. It peaked in November 2008, when it reached 98% a day. It destroyed the value of the Zimbabwean dollar. In 2009 the national currency was replaced by a system in which the currencies of other countries were recognized as equal official means of payment. For 50 Zimbabwean dollars (also called RTGS dollars), the highest denomination banknote, you can't even buy a loaf of bread these days. Converted to the Polish currency, it is officially worth 55 groszy.
Sources:
Cover image:
"What causes inflation? Stanford scholar explains", Melissa De Witte, September 6, 2022. Available at: https://news.stanford.edu/2022/09/06/what-causes-inflation/.
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