25/06/2022
GENERAL KNOWLEDGE ON INFLATION THAT ANY INVESTOR MUST REMEMBER.
When inflation occurs, it has a great influence on the economy, causing many investors to struggle and face difficulties. So what is inflation? What's the impact? The following article will share information related to this issue. If you are a new investor, you should not miss the important content below.
What is inflation?
Inflation is understood as the general price level of goods and services that increases continuously over time. That leads to a devaluation of a certain currency (because the general price level rises, one unit of currency will buy fewer services and goods than before).
Inflation reflects a decrease in the purchasing power of a currency unit. Currently, there are 3 levels:
From 0 to less than 10% is natural inflation
From 10% to less than 1,000% is hyperinflation
Over 1,000% is hyperinflation
Real-life examples of hyperinflation in Venezuela:
At the beginning of the 21st century, corruption and mismanagement created a major economic and political crisis in the country. The inflation rate here increased rapidly year by year, from 69% in 2014 to 2015 increasing by 181%. The peak for the period of hyperinflation in Venezuela in 2019. The inflation rate reached 2,600,000%.
To solve this problem, President Nicolas Maduro announced the issuance of a new currency, the Sovereign Bolivar, in place of the bolivar. The exchange rate is 1/100,000 i.e. 100,000 bolivars will be exchanged for 1 new sovereign Bolivar currency. It is estimated that a family of four in Venezuela must have an income of more than $200 to pay for basic services.
In fact, inflation is inevitable in every country. However, we would have an expectation of around 5% or less. This is a nice enough level for the growth and development of a good economy.
What causes inflation?
What is the cause of inflation? Here are the specific causes of this condition:
Demand-pull inflation
Demand-pull inflation is an increase in market demand. When the market's demand for a certain item increases, the price of that item will also increase, leading to an increase in the price of many services.
For example, food: Demand for pork increases. Since then, the source of goods has become more scarce, and the price of meat has increased. Since then, the prices of meat-based dishes have increased and other agricultural foods have also increased.
Cost-push inflation
The input factors of enterprises include: money for materials, machinery, wages, taxes, etc. If the above factors increase, it is imperative that businesses also increase the price of their products. That's called cost-push inflation.
Structural Inflation
Derived from the increase in "nominal" wages for employees. In the market, there are many efficient businesses with good income, so they will increase wages for employees. However, besides that, there are also many businesses that do not do well, but according to the trend of the market, businesses have to increase wages for employees. Because there is no good revenue, in order to increase wages for employees, that enterprise must increase product prices. Hence the inflation.
Export-led inflation
The number of exported goods skyrocketed, leading to an increase in total demand, but the total supply could not meet it, so it was necessary to gather domestic goods to meet export demand. This leads to unmet domestic demand. The imbalance between aggregate supply and demand is the main cause of inflation.
Import inflation
The price of imported goods increases (due to an increase in taxes or fees or an increase in world market prices). The selling price of such goods will have a high increase, until a certain time when the general price level is increased sharply by imported goods, it will cause inflation.
Inflation due to changes in demand
Is a change due to supply and demand, leading to a monopoly in the supply of a certain type of product, and a bad price policy, continuously increasing. Even if demand has decreased, the price of the good will not decrease.
Currency inflation
This will happen when the amount of money in circulation in the country increases. It can be because the central bank buys public bonds at the request of the state, which causes the amount of money in circulation to increase, or because the bank buys foreign currency to keep the domestic currency from depreciating against the foreign currency.
What are the consequences of inflation?
High inflation has enormous consequences for the economy and society of a country. Actual consequences:
Impact on real income of workers: High income, but converting that amount into valuable things is very low
Direct impact on bank interest rates. Rising interest rates lead to economic recession, unemployment occurs
Income distribution is not equal, the gap between the rich and the poor is growing
Directly affects the national debt. When the currency depreciates, the amount converted into foreign currency will increase sharply. Debts will become more severe.
As a result, investors' profits also decrease. The amount of interest received will no longer have its original value.
