Different types of inflation affect the economy at multiple levels, from moderate to devastating hyperinflation.
The inflation theory is a cosmological model that proposes a rapid exponential expansion of the universe during its first moments, immediately after the Big Bang. This phase of cosmic inflation would have occurred in a fraction of a second and explains several problems in the standard Big Bang model, such as the uniformity of temperature in the observable universe and the distribution of matter. Inflation helps us understand why the universe is homogeneous and flat on large scales.
Types of inflation
Inflation is an economic phenomenon that occurs in different ways depending on its causes and consequences in the economy. Below are some of the most prominent types and their impact on the economy.
Moderate inflation
It is the increase in prices at a low rate, generally in the single digits, that does not usually significantly affect the purchasing power of consumers. This type of inflation is common in healthy economies and is considered manageable.
Rampant inflation
It refers to inflation that exceeds 10% annually and is characterized by an accelerated increase in prices. Often, this type of inflation can upset the economic balance and is more difficult to control, generating uncertainty in the markets.
Hyperinflation
It occurs when inflation is extremely high, generally greater than 50% per month, and prices rise at an uncontrolled rate. This phenomenon usually derives from a loss of confidence in the national currency and is characteristic of economies in crisis. Prominent examples of hyperinflation include historical cases such as Germany in the 1920s and Zimbabwe in the 2000s .
Deflation
It is the inverse process of inflation and is characterized by a sustained decrease in the general price level. Although it may seem beneficial, deflation can reduce consumption and investment, as consumers tend to delay purchases while waiting for prices to continue falling, which can lead to an economic slowdown.
Stagflation
This phenomenon combines economic stagnation with high inflation, creating a challenging situation for economic policies. In this case, the economy experiences no or negative growth and an increase in unemployment , while prices continue to rise. Stagflation is difficult to address due to the combination of factors that adversely affect the economy.
Consumer Price Index
The Consumer Price Index (CPI) is a statistical measure that reflects the change in prices of a representative basket of goods and services purchased by households over time. It is a fundamental indicator to measure inflation and the cost of living in an economy, and is widely used to analyze the evolution of the purchasing power of the currency, adjust salaries, pensions and other economic contracts.
The CPI calculation is based on a basket of goods and services that includes basic consumer products such as food, housing, transportation, health, education and entertainment. Changes in the CPI reflect variations in the cost of living, and are therefore useful in assessing price stability in a country.
Inflation and economic growth
The relationship between inflation and economic growth is a key aspect in economic theory . A moderate level of inflation is usually associated with healthy growth, as it encourages spending and investment, boosting the business cycle. However, excessive inflation or an inflation crisis can hamper growth by reducing purchasing power and increasing economic uncertainty.
Economic growth models study the impact of inflation on the expansion of production and the well-being of a nation. For example, in an open market economy, foreign trade influences inflation and growth, since changes in international prices directly affect domestic prices.
On the other hand, in a closed economy, inflation depends more on internal factors, such as the money supply and the demand for goods and services. Inflation and economic growth are, furthermore, conditioned by factors such as economic demographics (change in population and workforce), the level of education, and innovations in the knowledge economy.
The consumer price index reflects changes in the cost of the goods and services we use daily.
The economic cycle and crises
Inflation varies throughout the economic cycle, and in each phase its impact is different. During an expansion phase, demand for goods and services increases, which can lead to moderate or even high inflation, depending on macroeconomic conditions. However, during a recession , consumption and investment tend to decline, reducing inflationary pressure and, in some cases, leading to deflation.
Economic crises and, in particular, debt crises are factors that can aggravate inflation in an economy. During a debt crisis, the government may be forced to print more money to finance its obligations, which can trigger high inflation or even hyperinflation.
These macroeconomic conditions can impact the economic well-being of the population, since the uncontrolled increase in prices reduces access to basic goods and affects the quality of life of citizens.
Inflation and sustainable economy
Inflation also influences the development of a sustainable economy. Maintaining sustained growth and a stable price level is to promote long-term well-being and sustainability. In the context of the global economy , the objective of many nations is to achieve a balance that allows sustained economic growth without causing high levels of inflation.
Economic education plays an important role in this quest, since by increasing the understanding of inflation and its effects on the economy, citizens and governments can make more informed decisions to avoid inflationary crises. Furthermore, the knowledge economy facilitates the development of more efficient technologies and production models, which can contribute to controlled inflation in a sustainable economy.
Monetary and fiscal policies are key tools to control inflation and stabilize the economy.
Monetary and fiscal policies
Fiscal and monetary policies are essential tools to regulate inflation, since they directly influence the price level through different mechanisms.
Fees and taxes
Tariffs and taxes on goods and services are fundamental components of fiscal policy . An increase can be directly reflected in the cost of production and transportation, which usually affects final prices, generating inflationary pressure. Governments can adjust these tools to moderate inflation, although they must also balance them with economic growth.
Interest rate
The interest rate, controlled by the central bank, is one of the most effective tools to influence inflation. When inflation is high, a central bank can increase interest rates to reduce credit and consumption, thereby decreasing demand and helping to stabilize prices. However, high interest rates can also slow economic growth, so their adjustment must be careful.
Exchange rate and real exchange rate
The exchange rate (the relationship between local and foreign currencies) and the real exchange rate (the inflation-adjusted exchange rate in both countries) also affect inflation. A low exchange rate makes imports more expensive, leading to an increase in the cost of imported goods and, therefore, higher inflation. On the other hand, a high exchange rate favors imports and reduces inflationary pressures.
In a global economy, the coordinated management of tariffs, taxes, interest rates and the exchange rate allows governments and central banks to control inflation, protect purchasing power and promote economic stability.