Inflation and deflation

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This inflationary tendency was reversed in the majority of the industrialized countries about the middle of the years 1980. Budgetary measurements and committed daring monetary policies at the beginning of the decade, combined with the brutal fall in the price of oil and raw materials, made it possible to find annual rates of inflation of less than 4 p. 100.

CAUSES:

The demand-pull inflation occurs when the total of the request exceeds the offer available, involving rises in price and making assemble the wages, the cost of materials, as well as the costs of exploitation and financing. Inflation by the costs occurs when the prices go up to cover the total of the costs and to maintain the profit margins. A spiral cost-price ends up developing when the entire lobby and all the entities economic reflect each increase. A deflation occurs when the effects of the spiral are reversed.

To explain how the basic components of the offer and the request can vary, the economists proposed three different theories: quantity of currency available, the general level of the incomes, as well as the productivity and the costs as variable of the offer. For the partisans of the monetarism, the modifications of the price level reflect the fluctuations of the currency available, definite traditionally by the money in cash and the deposit accounts at sight. According to them, so that the prices are stable, the money supply must increase at stable intervals adapted to the real output of the economy. The adversaries of this theory eloquent that the modifications of the money supply are a consequence, not a cause, variations of the price level.

The theory of the general level of the resources is founded on the work of the British economist John Maynard Keynes, published during years 1930. According to this last, consumption and the investment are determined by the modifications of the national income. Thus the budgetary expenditure and the tax policy of a government must be used to maintain levels optimal of production and employment. Then only, the money supply must be adjusted so as to finance the desired level of economic growth while avoiding economic crises and high interest rates which would discourage consumption and the investment. Thus, according to this theory, the public expenditure and the tax policy can be used to compensate for the demand-pull inflation and deflation an adjustment of the offer and.

The third theory concentrates on the elements relating to the offer. Those include the long-term rate/rhythm of the investment in capital and technological progress, the modifications of the composition and the age of the labour force, the displacement of the industrial activities, the rapid proliferation of the national regulations, the diversion of the investment towards non-productive uses, the increasing scarcity of certain raw materials, the social events and policies which reduced the incentives to work, as well as various economic shocks such as monetary and commercial problems, significant increases in the price of oil and disastrous harvests in one or the other part of the world. These problems relating to the offer can play a significant role in the development of monetary policies and budgetary.

CONSEQUENCES:

The specific effects of inflation or deflation mix and vary in time. Deflation is generally caused by the deceleration of the economic production and unemployment. Low prices can end up encouraging consumption, the investment and the foreign trade, but only provided that the fundamental causes of initial deterioration were corrected.

Inflation starts by increasing the trading profits, because the wages and the other costs increase less quickly than the prices, which allows more investments and larger payments of dividends and interests. Moreover, the personal expenditure increases sometimes thanks to anticipation of the future increases and, in the real estate, the hope to see assembling the prices can also attract purchasers. Interior inflation can improve the trade balance temporarily insofar as the same volume of exports can be sold expensive. Lastly, the public expenditure increases because many programs are, officially or not, indexed on inflation to maintain the actual value of the services public and the transfers of resources. The State can also anticipate the payment of more significant budgets with the revenues from taxes coming from incomes inflated by inflation.

Nevertheless, despite everything these temporary advantages, inflation ends up putting out of order the normal economic activities, especially if its rate/rhythm varies. The interest rates generally take account of the rate/rhythm of inflation anticipated which weighs down the production costs, discourages consumption and cause a drop in the value of the actions and the obligations. The rise of the rates of the mortgage loans and the flight of the prices of the real estate discourage construction. Inflation erodes the real purchasing power of the incomes and of the financial credits, which reduces consumption, especially if the consumers cannot or do not want to use their saving or to increase their personal debts. The investment suffers from the general decline of the economic activity and the profits are limited insofar as the employees ask so that the inflation which strikes their incomes is compensated by automatic mechanisms of rise of the wages. The majority of the raw materials and the costs of exploitation react very quickly to the inflationary signals. Higher prices end up harming exports, causing deficits in the trade foreign and involving problems of rate of exchange. Inflation is an essential element in the booms and recessions of the business cycles, which cause undesirable distortions in the prices and employment, as well as an uncertainty generalized as for the future performances of the economy.

The effects of inflation on each individual depend on many factors. The categories of population, whose incomes are relatively fixed, particularly in the categories of low incomes, suffer from the inflation, whereas those whose income is more flexible or negotiable can maintain it, even to increase it. Those which depend on asset with fixed face value, such as savings accounts, thought, insurances or long-term evidences of indebtedness, suffer from the erosion of the real richness. On the other hand, those whose assets have a fluctuating value like the real goods, the objects d'art, the raw materials and the goods permanent, can maintain or increase the value of their inheritance. The employees of the private sector fight to introduce indexing on the cost of living into their contracts of employment. The borrowers profit from inflation whereas the

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