The Threat of Inflation is Worldwide

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2 years ago

Topics: Inflation, Worldtrade, Writings

In the first week of last May, 91-year-old entrepreneur Warren Buffett warned everyone, 'Prepare now, hyperinflation is coming.' The inflation has finally caught up. And the most worried about this is Warren Buffett's own country, the United States. Their inflation rate exceeded 9 percent, the highest in 40 years.

United Kingdom, the ally of the United States, is also under pressure with inflation of more than 10 percent. The people of Bangladesh are also stressed about the cost of living. In fact, after nearly four decades, the entire world has once again entered a period of hyperinflation. The biggest challenge of the world economy now is inflation control.

Why is inflation so feared?

If asked which is the most unpopular indicator in economics. The answer is only one, inflation. This index affects people's lifestyle the most. The government also fears inflation the most. The index can easily make a government unpopular. In fact, no one wants inflation to rise.

Inflation is basically an increase in the price level at a certain point in time. In this way, the average price of the goods bought increased, but the income remained the same. Those with low or limited incomes suffer the most from inflation. Inflation also discourages saving.The value of money saved decreases. Let's say the interest or profit earned by keeping savings in the bank is 6 percent. Now if inflation rises to 7 percent, real income becomes negative. Many people spend money without saving. Many people are forced to break their savings. A decrease in saving means a decrease in investment. Decline in investment means loss of economy.

Many others invest in sectors for security that do not bring good to the economy. It is generally observed that the sale of non-productive goods such as gold, land or flats increases during times of uncertainty. Many people think that since the value of money is depreciating, it is better to buy products that will not depreciate easily. So inflation is a loss in almost all cases.

How did inflation come about?

About the year 1566. French economist John de Molestrait was an adviser to the French King and President of the Public Accounts Commission. He investigated the reasons for the rise in commodity prices and the gradual fall in the value of metal currency. There were no notes on paper then. And coins were made of precious metals like gold and silver. At the end of the investigation, he said, inflation is nothing but an illusion. In fact, the value of the currency's metal has decreased. And that's why the price of everything has gone up. At that time there were also complaints against the government that less gold or silver was being added during the minting of coins.

Just two years after this, a French jurist named John Bodin published an article entitled 'Response to the Paradox of Molestation'. He opposed the molestrait. He said that inflationary pressure increased due to excess gold and silver flowing into Europe. At that time there were Spanish colonies throughout South America.Silver mines were found in those places. Before that, Christopher Columbus discovered America in 1492. Precious metals were also coming to Europe from there. John Bodin said the problem was caused by the influx of gold and silver. He said that the supply of gold and silver has increased two and a half times compared to earlier. This is the main cause of inflation. Because the money supply increased, production did not.

Later economists accepted Bodin's theory. It is said to be the first quantity theory of money, through which inflation is analyzed. It was later developed by economists. Among them are David Hume in 1752, Irving Fisher in 1911, John Maynard Keynes in 1936 and Milton Friedman in 1956.

Why does inflation happen?

Theoretically, there are two theories as to why inflation occurs. Such as quantity theory of money and theory of excess demand. The first is that when the money supply increases in the market, the prices of various commodities increase. In that the product remains the same, but the money in the hands of the people increases. And the theory of excess demand is that money and production of goods are the same as before, but as people have increased, demand has also increased. This causes inflation.Again, there are two types of inflation as a reason. Eg: Inflation that occurs when demand increases is called demand-driven or demand-pull inflation. Again, if the price of the materials used to produce the product increases, the cost of production increases. If the price of goods increases, it is called cost-push inflation. Inflation is generally divided into food inflation and non-food inflation.

Inflation can be further divided into two categories. Such as mild inflation and hyperinflation. Mild i.e. when inflation increases slowly, people adjust to it slowly, income increases, producers invest. It improves the country. But if it grows by leaps and bounds, no one can match it. As a result, people's real income decreases. People's quality of life deteriorates. This surge is called hyperinflation.

History of inflation

History tells us that in the third century Roman Empire experienced massive inflation. This is called the first inflation event in the world. Great inflation occurred in China in the fourteenth century, after the introduction of paper notes instead of currency. And elsewhere, including Europe, experienced high inflation in the sixteenth century. Basically, the theoretical explanation of inflation started from this time.

The nineteenth century was an exception. There was no inflation, but the opposite, called deflation. From the Battle of Waterloo in 1815, the defeat of Napoleon Bonaparte, until the outbreak of the First World War in 1914, inflation was negligible. Hyperinflation in the 19th century was only in the United States, due to the Civil War. But inflationary pressures eased immediately after the war.

The 20th century was a century of hyperinflation. As people's living standards have increased in this century, the pressure of inflation has also increased. This century saw hyperinflation in Germany, after World War I. Between 1922 and 1923, German inflation rose to 322 percent.

After World War II, the situation in Hungary was even worse. Between August 1945 and July 1946, the country's inflation rose to 19,000 percent. That means it has increased by 19 percent every day. Even a few years ago, inflation in Zimbabwe was 3700 percent.

Again in the reign of inflation

The world's most unpopular indicator of the economy is back again. IMF First Deputy Managing Director Geeta Gopinath warned at an international conference on economics that the behavior of inflation this time is different and will not be easily brought under control. He also said that inflation is higher in emerging economies than in advanced economies.

Inflationary pressure has increased due to many reasons. The main reasons are two epidemics and war. During a recession, labor supply decreases and production also decreases. But at the same time huge amount of stimulus has been given, which has increased inflation. As the incidence of epidemics decreased, production costs increased as the supply system did not improve to meet the increase in demand.

The price of fuel increases when the war between Ukraine and Russia starts. Inflation becomes very uncontrolled. Gita Gopinath said, in this situation, if inflation is not controlled, social unrest may increase, especially in low-income countries. Geeta Gopinath believes that central banks have to play a key role with the help of monetary policy to curb inflation. Inflation expectations should also be reduced. Because inflation is expected to increase—controlling inflation becomes difficult.

what to do

New Zealand economist William Phillips wrote in 1958 of an inverse relationship between inflation and unemployment. He said, if the economy is strong, the demand for consumer goods increases, then the demand for labor also increases. It will increase wages, increase the price of goods, but reduce unemployment. This inverse trend of inflation and unemployment is called the 'Phillips line' after Phillips. The world's central banks value the line.

Again, John Taylor of Stanford University spoke of the method of controlling the money supply by raising or lowering interest rates during inflation. Accordingly, when there is a threat of inflation, the central bank raises interest rates to reduce market demand. As a result, people cut back on purchases, and investment declines.

This reduces the inflationary pressure. Again, when the economic recession occurs, the central bank tries to increase the money supply by reducing interest rates. It is called 'Taylor Rule' after John Taylor.

The IMF says the current situation is so critical that the Phillips line is not working properly. The US central bank, the Fed, has now aggressively adopted the Taylor rule to reduce pressure, cutting interest rates. But many fear that the recession is deepening.

If that doesn't work, if inflation doesn't come down, but recession remains, then the danger is even greater. It is called stagflation, which the World Bank fears will happen. So all in all, the whole world is in a complicated situation with inflation.