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Defining Inflation
Inflation, also known as a decrease in the purchasing power of a currency over time, is a phenomenon where the general price level of goods and services rises, leading to a reduction in the real value of money. When prices rise, consumers can purchase fewer goods and services with the same amount of money. Thus, inflation mirrors the declining purchasing power of the currency.
Understanding the Nature of Inflation
Types of Inflation
- Mild Inflation: 0 - 10%
- Moderate Inflation: 10 - below 1000%
- Hyperinflation: Above 1000%
In reality, most countries aim for inflation below 5% - the level of mild inflation. If a country's expected growth rate is 10% in a year, it means that the country's currency depreciates by 5%, and they only achieve a real growth rate of 5%.
2. Notable Examples of Inflation
The economies of Greece in 1944, Germany in 1923, Yugoslavia in 1994, Zimbabwe in 2008, and Hungary in 1946 are some of the most evident examples of inflation. These were extreme cases of hyperinflation in history, where the value of goods/services could double in just a few days, or even within as little as 15 hours (as seen in Hungary in 1946).
The aftermath of these inflationary 'storms' led the governments of these countries to resort to changing their currency units due to the uncontrollable depreciation of their existing currency. It was indeed a period of severe crisis for many European nations. Despite being addressed through various stringent measures, inflation continues to haunt the economies of many countries, notably Germany and Hungary in earlier years.
3. Causes of Inflation
Inflation is the foremost enemy of any economy. No country wishes for this condition to prevail as the consequences of inflation pose numerous risks and challenges. There are various causes of inflation, as outlined below.
3.1 Demand-Pull Inflation
An increase in the demand for a particular product can lead to its price escalation. This can also cause prices of similar products to rise, resulting in an overall surge in market prices. Inflation driven by rising consumer demand and market conditions is referred to as 'Demand-Pull Inflation.'
High demand is also a cause of inflation
3.2 Cost-Push Inflation
Factors such as wages, costs of purchasing raw materials, machinery maintenance costs, employee insurance costs, etc., are referred to as business cost-push factors. When the prices of these factors increase, the overall production costs for businesses also rise.
Therefore, to maintain business profits, companies will increase the prices of their products. This causes the overall price level of the economy to rise as well. This process is known as 'Cost-Push Inflation.'
3.3 Structural Inflation
Apart from the aforementioned causes, structural factors also contribute to the inflationary state of the economy. In efficient business sectors, companies raise 'nominal' wages for workers.
Structural inflation brings adverse effects to the economy
However, in inefficient business sectors, many companies also follow this trend and increase 'nominal' wages for workers. However, due to low profitability in production and business activities, companies raise product prices. This contributes to the inflationary state.
3.4 Inflation due to changing market demand
This situation occurs when the demand for a particular item decreases, while the demand for another item increases. In this case, there are 2 scenarios:
- In cases where the market has a single supplier and almost fixed prices, the item experiencing decreased demand still maintains its price.
- Meanwhile, for items experiencing increased demand, their prices will rise.
Both scenarios lead to a general increase in market prices and give rise to inflation.
Market demand is also a factor contributing to inflation
3.5 Other Causes of Inflation
If you're still wondering, 'What are the causes of inflation?', you can consider the following points:
- Export-Induced Inflation: Increased exports lead to total demand exceeding total supply. As most goods are gathered for export, domestic goods become scarce, causing domestic demand to exceed domestic supply. When supply and demand are out of balance, inflation occurs.
- Import-Induced Inflation: When the price of an imported commodity increases, the domestic price of that product will also rise accordingly. And when the overall price of that commodity is driven up by import prices, inflation will occur.
- Monetary Inflation: This is a problem encountered by many economies. When the amount of money in circulation increases, the flow of money increases, leading to inflation.
4. Inflation Situation in Vietnam
The inflation rate in Vietnam from 2016 until now has always remained under control, consistently staying below the 5% threshold. Although Vietnam's inflation rate in 2018 showed a significant difference compared to the baseline inflation rate, it accurately reflected the economic landscape as the prices of healthcare and education services increased, leading to price hikes in many items such as food, and grains. According to economic experts, Vietnam's 2018 inflation rate is under control, indicating a significant improvement in the standard of living and income of the people.
Economists predict that in 2019, the Vietnamese economy will face numerous difficulties and challenges. This year, Vietnam's economy will be under pressure from various factors such as fluctuations in fuel prices, and domestic product price wars. In this context, the State Bank of Vietnam expects inflation to be maintained at 4% - a figure that requires serious implementation by all relevant agencies and departments.
Inflation is simply the depreciation of currency, causing significant repercussions for the economy. This is a problem that every country, including Vietnam, must confront amidst the current global economic fluctuations. Additionally, for those interested in learning more about Stocks, click here.
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