The Essence of Inflation and Its Leading Causes

Topic: Finance
Words: 610 Pages: 2
Table of Contents

Introduction

In the video Analyze this! Inflation, Prachi Mishra from a research department in International Monetary Fund, discusses the essence of inflation, its leading causes, and trends. Inflation has been a part of people’s lives for a long time, causing prices to increase gradually or drastically. Mishra indicates that prices for everything, including food, and transportation become more and more expensive, and there are several factors people need to understand inflation.

Discussion

The first vital factor that needs to be understood is that inflation is driven by supply and demand. In this respect, lower supply and higher demand are both causes of higher inflation. Mishra provides examples of the government stimulus packages that contributed to more money flowing into the markets, leading to greater demand and a rise in the inflation rate after the pandemic (Analyze this! Inflation, 2021). Moreover, supply chain disruptions, including logjams in major ports, in combination with increased demand for global goods, too, boost the inflation rate.

While increased demand can be considered beneficial in the short run, indicating demand over the medium and long term, it can discourage investments and impede growth. According to Mishra, it is important to understand whether inflation is anchored (Analyze this! Inflation, 2021). When it is anchored, inflation is close to the central bank target. In this case, central banks and governments control inflation and can reduce the interest rate, encouraging investments and demand without significantly impacting inflation. On the other hand, the opposite trend of inflation is de-anchoring, implying that it is rapid and hard to control.

The last point made by Mishra is the importance of communicating the trends of inflation and its effects. It is vital to understand that increasing housing costs and prolonged supply shortages are the factors that impede inflation from decreasing. Additionally, in developing countries, rising food prices and falling currency values contribute to inflation as well (Analyze this! Inflation, 2021). Thus, there needs to be the implementation of befitting policies, as well as timely action to keep the prices stable.

I agree with every statement made by Mishra since, in the face of the global pandemic, supply shortages, supply chain disruptions, and political events, the inflation rate only exacerbates. Most of the events form a domino effect, meaning that for the most part, Covid-19 is to blame for the unabating inflation. In this respect, supply chain disruptions stemming from stricter border procedures and new customs requirements.

Additionally, I agree that developing countries experience the negative impact of growing inflation. What is more, I think there is an increased necessity to control the inflation rate with all the necessary policies. The most prominent example can be a developing country Venezuela which is now battling not just inflation but hyperinflation. Due to printing too much money, the country experienced inflation that is measured in hundreds of percent. Moreover, I believe that the U.S. government stimulus packages and the government’s support of the markets led to such rapidly growing inflation that it is necessary to increase the interest rate. While not similar to Venezuela, the U.S. currency is one of the most stable currencies worldwide, and inflation of this currency can be a butterfly effect, leading to higher inflation in other countries.

Conclusion

Hence, inflation is the leading cause of constantly rising prices. Several factors contribute to the increase in the inflation rate. For example, higher demand and lower supply can lead to growing inflation. Consequently, depending on the inflation rate, central banks and governments either increase or decrease the interest rate, which later influences the demand and investments. However, other factors contribute to inflation, such as growing housing costs, falling currency values, and food prices.

Reference

Analyze this! Inflation. (2021). International Monetary Fund.

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