For more than a year, the topic of inflation has been on the headlines of world portals and newspapers. Yes, this phenomenon has become a very real problem again. In this article, we will explain what inflation is and why it hit us all right now.
Inflation, or what exactly?
Inflation is a general increase in prices. The word “universal” is especially important here. Why?
Let us remember that the market economy is based on the volatility of the prices of goods and services. These are almost constantly changing: some increase, others decrease. There is nothing strange about it. The problem of inflation only arises when a general increase in prices is recorded.
Inflation is caused by many factors. The reason may be higher prices of raw materials, fuels, energy or gas. In history, however, it often occurred as a result of printing money. Already in antiquity, rulers tried to release coins of increasingly poor quality – using less and less silver or gold to produce one coin. The market initially allowed to be deceived, but after some time it realized that it had been manipulated and increased the prices of products and services.
As a result of inflation, the same amount of money can buy much less products and pay for fewer services. For example, if in a given year we could buy Y kilograms of carrots for X zlotys, as a result of inflation in the following year we can buy less carrots for the same amount of zlotys.
If the increase in earnings is not as high as the spike in inflation, the phenomenon of social impoverishment occurs.
Origin of current inflation
Currently, the problem of inflation is the result of a combination of many factors. First of all, the previous financial crisis of 2008 was “printed”. To defeat it, central banks printed huge amounts of cash for more than a decade. It had to end with inflation.
Added to this is the COVID-19 pandemic, or more precisely, how governments fight it. As a result of the lockdowns, supply chains were interrupted (supply of products was reduced), but the markets were also flooded with freshly printed money (in Poland: anti-covid shields). Initially, prices did not increase due to lockdowns – the circulation of money in the markets fell to a minimum. As the world began to recover from the pandemic and shops and restaurants reopened, the circulation of money in the economy increased, and it was the combination of these factors – excess cash in the market and increased circulation – that led to inflation.
How to beat inflation?
Overcoming inflation is not easy and is based on drawing excess money from the market. To this end, central banks raise interest rates. Thanks to this, the market no longer has access to cheap money. In addition, investors withdraw funds from the stock exchange and deposit, for example, in banks (hoping for higher interest). The problem is that all of this reduces the number of investments. This may lead to another threat – recession and general economic crisis. The task of governments and central banks in such conditions is therefore to conduct such policies that at the same time reduce inflation, but also not too sharply hamper economic growth.
CPI inflation and core inflation
It is also worth explaining what CPI inflation and core inflation are, because these concepts often appear in the debate about price increases.
The former is the basic measure of inflation, determining the increase in the prices of consumer goods and services – those most often purchased by households in the country. What is the difference between CPI inflation and core inflation? Core inflation is a simplified measure of CPI inflation. It arises after adjusting CPI inflation for certain groups of goods and services that are characterized by temporary, seasonal or supply-related shocks in prices.
