Types of Inflation

There are several ways of defining inflation. In some contexts it refers to a steady increase in the supply of money. In others it is seen as a situation where demand persistently exceeds supply. It seems best, however, to define inflation in terms of its basic symptom-rising prices. Inflation is a situa­tion in which the general price level is persistently moving upwards.

In the extreme form of inflation prices rise at a Phenomenal rate and terms such as hyperinflation run away inflation, or galloping inflation have been used to explain the situation. Germany experienced this kind of inflation in 1923 and by the end of that year prices were one million times greater than their pre-war level. Towards thе end of 1923, paper money was losing half or more of its value one hour, and wages were fixed and paid daily.

Under conditions of hyperinflation people lose confidence in the currency's ability to carry out its functions. It becomes unacceptable as a medium of exchange and other commodities, such as cigarettes, are used as money. When things have become as bad as this the only possible course of action is to withdraw the currency and issue new monetary units. So great was the loss of confidence in Hungary that the new currency had to be given a new name, the Forint replacing the Pengo.

Another type of inflation is described as suppressed inflation. This refers to a situation where demand exceeds supply, but the effect on prices is minimized by the use of such devices as price controls and rationing. We should note that price controls do not deal with the causes of inflation; they merely attempt to suppress the symptoms. The excess demand still exist and it will tend to show itself in the form of waiting lists, queues, and almost inevitably, in the form of black markets.

The most common type of inflation is that experienced since the war in Britain and other developed countries. This is creeping inflation where the general price level rises at an annual rate between 1 and 6 percent.

The causes of inflation are usually classified as demand-pull or cost-push.

Demand inflation

Demand inflation may be defined as a situation where aggregate demand persistently exceeds aggregate supply at current prices so that prices are being 'pulled' upwards. This type of inflation is usually associated with conditions of full employment. If there are unemployed resources available, an increase in demand can be not by bringing these resources into employment.

Supply will increase and the increase in demand will have little or no effect on the general price level. If the total demand for goods and services continues to increase, however, a full employment situation will eventually be reached and no fur­ther increases in output are possible (i.e. in the short run). Once the nation's resources are fully employed, an increase in demand must lead to an upward movement of prices.

A situation of excess demand may arise when a country is trying to achieve an export surplus, in order, perhaps, to pay off some overseas debt. Exports are inflationary because they generate income at home but reduce home supplies. Imports, of course, can make good this deficiency of home supply, but if exports are greater than imports there will be excess demand in the home market unless taxes and savings are increased to absorb the excess purchasing power.

Demand inflation might develop when, with full employment, a country tries to increase its rate of econom­ic growth. In order to increase the rate of capital accumula­tion, resources will have to be transferred from the produc­tion of consumer goods to the production of capital goods. Incomes will not fall since the factors of production are still fully employed, but the supply of the things on which these incomes may be sent will fall. Unless taxation and/or sav­ings increase there will be excess demand and rising prices.

1. Read and translate text A.

2. Fill in the gaps:

employment, conditions, level, deal, defining, confidence, functions, withdraw, upwards, causes, income

1. There are several ways of... inflation.

2. Inflation is a situation in which the general price ... is persistently moving ....

3. Under ... of hyperinflation people lose ... in the cur­rency's ability to carry out its ... .

4. The only possible cause of action was to ... currency.

5. Price controls do not... with the ... of inflation.

6. This time of inflation is usually associated with the conditions of full ... .

7. Exports generate ... at home but reduce home supplies.

3. Try to find synonyms:

type, steady, level, runaway, rise, standard, expense, medi­um, cause, confidence, replace, attempt, rate, constant, kind, galloping, means, reason, trust, change, try, total, increase, lead to, aggregate, achieve, result in, generate, reach, produce, reduce, tempo, decrease, expenditure

4. And now antonyms:

rise, lose, fixed, excess, growth, private, income, fall, find, decline, flexible, deficiency, expenditure, public

5. Make the words with opposite meaning:

decrease, upwards, post-war, acceptable, employment, possible

6. Translate, please:

постійне зростання, загальний рівень цін, з феноменальною швидкістю, передвоєний рівень, в умовах гіперінфляції, виконувати свої функції, єдиний можливий спосіб дії, втрата довіри, причина інфляції, у вигляді чорних ринків, повзуча інфляція, національні ресурси, темп накопичення капіталу, приватні заощадження, внутрішній ринок, рівень інфляції.

7. Give 3 forms of the verbs:

refer, pay, withdraw, lose, rise, reach, lead, arise, absorb, fall, send

8. Put the words in the following sentences in the correct order:

1. are, ways, several, there, of, inflation, defining.

2. controls, deal, not, price, do, the, with, causes, of, inflation.

3. inflationary, they, because, exports, are, home, reduce, supplies.

4. steady, to, a, inflation, refers, increase, of, money, the, supply, in.

5. an, extreme, inflation, of, form, in, at, rate, prices, a, phenomenal, rise.

6. in, this, Germany, 1923, kind, experienced, inflation, of.

9. Try to find correct prepositions:

1. It seems best, however, to define inflation ... terms ... its basic symptoms-rising prices.

2. Inflation is a situation ... which the general price is persistently moving upwards.

3. Towards the end ... 1923, paper money was losing half or more ... its value ... one hour.

4. ... conditions of hyperinflation people lose confi­dence ... the currency's ability to carry ... its func­tions.

5. This is creeping inflation where the general price level rises ... at an annual rate ... 1 and 6 percent.

10. What information can you get from these sentences?

1. In some contexts inflation refers to a steady increase in the supply of money.

2. In an extreme form of inflation, prices rise at a phe­nomenal rate.

3. Germany experienced this kind of inflation in 1923.

4. By the end of that year prices were one million time greater then their pre-war level.

5. Towards the end of 1923, wages were paid daily.

11. Use the words in brackets to end the sentences:

1. Other commodities, such as cigarettes, ... (to use) as| money.

2. So great... (to be) the loss of confidence in Hungary) that the new currency had ... (to give) a new name.

3. Another type of inflation ... (to describe) as sup-| pressed inflation.

4. The effect on prices ... (to minimize) by the use of such devices as price controls and rationing.

5. The most common type of inflation is that ... to (experience) since the war in Britain.

6. The causes of inflation may ... (to classify) as demand-pull or cost-push.

7. Demand inflation may ... (to define) as a situation where aggregate demand persistently ... (to exceed) aggregate supply at current prices so that the prices ... (to pull) upwards.

8. This type of inflation ... (to associate) with conditions of full employment.

9. If there are unemployed resources available, an increase in demand can ... (to meet) by bringing these resources into employment.

10. If the total demand for goods and services continues ... (to increase), a full employment situation ... (to reach).

11. In order ... (to increase) the rate of capital accumu­lation, resources will have ... (to transfer) from the production of consumer goods to the production of capital goods.

12. Even when the additional government spending ... (to finance) from the taxation the effect may still... (to be) inflationary.

12. How do you think?

1. How can inflation be defined?

2. What is hyperinflation?

3. What happens under conditions of hyperinflation?

4. What is the only possible course of action when money becomes unacceptable as a medium of exchange?

5. What is suppressed inflation?

6. How can you characterize creeping inflation?

7. How are the causes of inflation usually classified?

8. How may demand inflation be defined?

9. What is demand inflation usually associated with?

10. When may a situation of excess demand arise?

11. Why are exports inflationary?

12. When may demand inflation develop?

13. What do you know about "Types of Inflation".

14. Read text B. Make a plan.

Text В