What is inflation?
The phenomenon of inflation is a general increase in the prices of an economy's goods and services over a certain period of time. This increase in prices is measured through the CPI index.
Inflation is one of the major macroeconomic variables considered by governments for economic policy decision-making, since it provides information on the behaviour of an economy, and helps predict future developments.
Inflation means a reduction in the spending power of money: higher prices over a considerable period of time mean that, because everything is more expensive, people can buy fewer products than before for the same amount of money.
Types of inflation
Inflation may be classified depending on its causes (inflation due to demand or costs, mainly), or on the basis of the percentage increase (deflation, moderate inflation, galloping inflation or hyperinflation).
The stagflation phenomenon is used to describe an economic situation with high inflation and stagnation of economic growth, with very little or negative growth.
This is one of the most difficult situations to resolve, since the solutions to control rising prices and reactivate the economy tend to contradict each other.
Underlying inflation means changes in prices of goods and services on the CPI, with no consideration given to the effect of energy and non-transformed foodstuffs.
This indicator is more accurate than general inflation, since it gives a better idea of the structural situation of a country's economy, and helps predict future developments in inflation, since it removes factors considered transitory or extremely volatile from the calculation, such as energy products and non-transformed foodstuffs. This is the indicator used by authorities and central banks to make their economic and monetary policy decisions in order to correct inflation.
Inflation is defined as galloping in the event of a disproportionate increase in prices, in excess of two or three digits in one year (more than 10 or 100%). Economic problems begin to emerge in this situation.
The term hyperinflation is used when prices rise at rates in excess of 1,000% a year. It is an extreme and exceptional scenario, which leads to serious economic crisis. It usually occurs during wars, political crises etc., when expansive policies are implemented involving arbitrary creation of money.
In hyperinflation situations prices spiral out of control and consumers' spending power falls rapidly, whereupon the population tries to spend its money as quickly as possible before prices rise even further and money loses all its value. This leads to what is known as the “flight of money”.