Inflation and deflation

 Inflation and deflation terms used respectively to describe the reduction or the increase in the purchasing power of the currency in goods and services.  

Inflation is a full and constant increase general level of the prices, measured by an index of the cost of various goods and services.  An increase repeated in the prices erodes the purchasing power of the currency and other financial credits with fixed value, thus causing serious distortions and economic uncertainties.  Inflation appears when economic pressures and the anticipation of certain events make assemble the demand in goods and services beyond the offer available to the existing prices, or when the production available is reduced by a failing productivity or the constraints of the market.  

Deflation is a constant fall of the general level of the prices, as that which occurred during the economic crisis of 1929.  It is generally associated a prolonged erosion of the economic activity and a level of high unemployment.  Nevertheless, the falls of price generalized are very rare today, and inflation became the principal macroeconomic variable affecting economic, public or deprived planning  

VARIOUS TYPES OF INFLATION

A crawling inflation, of some points of percentage per annum, does not constitute a serious threat for economic and social progress.  It can even stimulate the economic activity.  Indeed, the illusion of an increase in the income beyond the real productivity encourages consumption, and the investment in the real estate increases by the anticipation of a future rise of the prices.  In the commercial activity, the investment in factories and equipment accelerates because the prices go up more quickly than the costs, and the public private individuals, companies and organizations borrowers become aware that the loans will be refunded with money carrying less purchasing power.  

More serious is the model of the chronic inflation,  characterized by a more significant rise of the prices reaching annual  rates ranging between 10 p. 100 and 30 p. 100 in certain  industrialized countries and sometimes even 100 p. 100 or more in some  Third World countries.  The chronic inflation tends to becoming permanent and installs a vicious circle.  To adapt to the chronic  inflation, the normal economic activities are put out of order:  the  consumers buy goods and services to avoid paying prices even higher in  the future;  the real speculation increases;  the commercial  investments concentrate on the short term;  the incentives to save, or  to subscribe to an insurance, a pension plan or long-term obligations  are restricted, because inflation reduces the purchasing power in the  long term of these financial products;  the governments quickly  increase their expenditure in waiting of inflated incomes;  the  exporting nations see the competitiveness of their trade compromised  and are forced to resort to the protectionism and an arbitrary control  of the currency.  

In its extreme form, the chronic rise of the prices becomes hyperinflation and causes the fall of the whole economic system.  For example, the hyperinflation which struck Germany after the First World War caused to multiply the volume of the currency in circulation by more than 7 million and the prices by 10 million over the sixteen months which proceeded November 1923.  Other examples of hyperinflation  occurred in the United States and in France at the end of the XVIII  E century, in the USSR and Austria after the First  World War, in Hungary, in China and Greece after the Second World war,  and in some Third World countries during these last years.  During one period of hyperinflation, the currency and the credit increase at exponential intervals, destroying all the bonds existing between actual value and face value and making necessary of the complex systems of barter.  The governments resort to the board with tickets to finance the increase in the programs of expenditure, and these inflationary financings of the budget deficits (see Budget) destroy economic, social and political stability.  

At the time of the bimetallism or gold standard, a significant form of inflation was the debasement of coinage, which consisted in for a sovereign reducing the quantity of noble metal contained in the coins.  If this operation ensured of the short-term profits the State, which could strike more currency for the same quantity of noble metal, it raised the long-term prices, because of the law of Gresham, which wants that the «bad currency drives out the maid ".  These adulterations were often used to finance the effort of war, which partly explains the correlation which exists between political inflation and risings.  In Europe, the money surge come from the New World starting from the XVI E century would have also contributed to the progressive growth of inflation as from this time, the value of the noble metal tending to decrease.  The current governments carry out such adulterations when they print more currency or modify the value by another means of it.  

HISTORY:  

One finds many examples of inflation and deflation through the history, but no detailed document makes it possible to quantify these tendencies before the middle Ages.  The historians identified a long period of inflation between the XVI E and the beginning of the XVII E century in Europe, though atman average annual rate of 1 p. 100 to 2 p. 100 modest good for our time.  A significant change took place during the war of American  Independence, with an average rise of the prices of 8,5 p. 100 per  month in the United States and, during the French revolution, with an  average rate of inflation monthly of 10 p. 100.  These relatively short crises were followed long periods of inflations and world deflations related to political and economic events particular.  

Compared to the other periods of the history that which follows the Second World War is characterized by relatively high levels of inflation in many countries and, about the middle of the years 1960, a tendency to chronic inflation settled in the majority of the industrialized countries.  Thus, by 1965 to 1978, the prices the consumer increased atan annual average rate of 5, 7 p. 100 in the United States, with a peak of 12, 2 p. 100 in 1974.  In the United Kingdom, inflation also reached a record of 25 p. 100 in 1974, after the quadrupling of the world prices of oil.  Several other countries underwent a comparable acceleration of the rise of the prices, but some, like the Federal Republic of Germany (then limited to the West Germany), have escaped with a chronic inflation.  If one considers the level of integration of many countries to the world economy, these disparate results reveal the relatively good effectiveness of the national economic policies.  

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