Eye On Inflation(1)

里维宁 原创 | 2007-08-23 15:54 | 收藏 | 投票

Well... for almost all developing economy inflation is definit, something that a economy can't grow with or without. In fact in all those good old years we Chinese just borrowed the model from Russian brothers, instead of Uncle Sam. The whole thing was planned. If  money supply, ( I bet there was no such a difference as M1 or M2) more than needed ,  just notify the  press firm to print less and visi versa. Unfortunitely, most of the world economy does not revolute in that manner and is somewhat more sophisticated than one originally thought. Here are some quotes from outside China on inflation:

"There are several variations on inflation:

  • Deflation is when the general level of prices is falling. This is the opposite of inflation.
  • Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
  • Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil price.

In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.

Causes of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted: 

Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies. 

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

Costs of Inflation
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.

Problems arise when there is unanticipated inflation:

  • Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
  • Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
  • People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
  • The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
  • If the inflation rate is greater than that of other countries, domestic products become less competitive.

People like to complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your wages.

Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation. "

Wondering why those decision makers don't coach the public investors with these fundamentals. Just let them know and sky won't fall down.:))

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