A complete overview on inflation

Inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power  of money. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate.

What is inflation? Definition of inflation.
What inflation means?

Inflation is the term we usually use to explain rising prices of products or services, that how quickly prices go higher at particular time period is know as inflation. The general increase in prices.

Definition:

Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year. In Pakistan, inflation is calculated by taking the WPI as base.

Description

Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services, this is basic concept of inflation.

It has its worst impact on consumers. Increasing prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep inflation under control by changing their policies and taking official decisions.

Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% per year  is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a limited level of inflation.

Deflation: ( opposite of inflation)

When prices decline across a sector of the economy or throughout the entire economy, it’s called deflation. While it might seem nice that you can buy more for less tomorrow, economists warn that deflation can be even more dangerous for an economy than unchecked inflation.

When deflation takes hold, consumers delay purchases in the present as they wait for prices to decline even further in the future. If left unchecked, deflation can diminish or freeze economic growth, which in turn decimates wages and paralyses an economy.

Types of inflation

Inflation is broadly categorized into 3 types that are discussed below:

• Demand-Pull Inflation

When the money supply increases in the market the purchasing power of individuals also increases, thus leading to increases in demand and a shortage in the supply causing Demand-Pull inflation. Due to higher demand and less supply, the prices of goods get increased. Thus this gap between the demand and supply leads to Demand-Pull inflation.

Demand Pull Inflation

• Cost-Push Inflation

The Cost-push inflation is just contradictory to Demand-Pull inflation and this type of inflation occurs when the overall price of goods increases due to an increase in the cost of other commodities required in production like the machines, labour wages, etc. The increase in the production cost results in the rise of the value of the finished good.

Cost Push Inflation

• Built-in Inflation

Built-in inflation refers to the inflation that is existing and is expected that it will also continue in the future. As the fuel prices, labor wages, and cost of machines keep on increasing that results in an increase in the final value of the good. Thus built-in inflation is the expected inflation rate that’s going to rise by a significant percentage every year.

Built-in Inflation

How is Inflation Measured?

Inflation can be easily calculated with the help of the simple mathematical formula mentioned below. 

Inflation rate (%) =(Final CPI Index Value/Initial CPI Value)*100

You need to know the CPI to calculate the inflation rate from the above formula. So, every household needs certain goods and services for their daily life and they have a certain budget for it according to their income. So, the government conducts the survey and measures the purchasing capacity of random households based on certain essential goods and compares the purchasing capacity of households in the present year with the last year. And this average is known as the Consumer Price Index (CPI). These goods and services mainly include food, transportation, and medical care. 

What are the causes of inflation?

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (AD) (economic growth too fast) or cost-push factors (supply-side factors).

Summary of the main causes of inflation

1. Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)
2. Cost-push inflation – For example, higher oil prices feeding through into higher costs.
3. Devaluation – increasing cost of imported goods, and also the boost to domestic demand.
4. Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.
5. Expectations of inflation – High inflation expectations causes workers to demand wage increases and firms to push up prices.

1. Demand-pull inflation

If the economy is at or close to full employment, then an increase in aggregate demand (AD) leads to an increase in the price level (PL). As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power.

AD can increase due to an increase in any of its components C+I+G+X-M

We tend to get demand-pull inflation if economic growth is above the long-run trend rate of growth. The long-run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity. Demand-pull inflation can be caused by factors such as

• Higher wages.
• Increased consumer confidence.
• Rising house prices – causing positive wealth effect.

Example of demand-pull inflation in the UK

In the 1980s, the UK experienced rapid economic growth. The government cut interest rates and also cut taxes. House prices rose by up to 30% – impact a positive wealth effect and a rise in consumer confidence. This increased confidence led to higher spending, lower saving and an increase in borrowing. However, the rate of economic growth reached 5% a year – well above the UK’s long-run trend rate of 2.5 %. The result was a rise in inflation as firms could not meet demand. It also led to a current account deficit. You can read more about demand-pull inflation at the Lawson Boom of the 1980s.

2. Cost-push inflation

If there is an increase in the costs of firms, then businesses will pass this on to consumers. There will be a shift to the left in the SRAS.

Cost-push inflation can be caused by many factors

1. Rising wages If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost-push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand) See also wage-push inflation.

2. Import prices One-third of all goods are imported in the UK. If there is a devaluation, then import prices will become more expensive leading to an increase in inflation. A devaluation/depreciation means the Pound is worth less. Therefore we have to pay more to buy the same imported goods.

In 2011/12, the UK experienced a rise in cost-push inflation, partly due to the depreciation of the Pound against the Euro. (also due to higher taxes)

In 2022, the UK experienced more cost-push inflation due to rising oil, gas prices, Ukraine conflict, Brexit cost issues, depreciation in Pound, Covid supply constraints.

3. Raw material prices The best example is the price of oil. If the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost-push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world.

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4. Higher inflation expectations

Once inflation sets in, it is difficult to reduce inflation. For example, higher prices will cause workers to demand higher wages causing a wage-price spiral. Therefore, expectations of inflation are important. If people expect high inflation, it tends to be self-fulfilling. When expectations are low, temporary rise in prices tend to be short-lived and fade away.

5. Printing more money

If the Central Bank prints more money, you would expect to see a rise in inflation. This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply.

However, in exceptional circumstances – such as liquidity trap/recession, it is possible to increase the money supply without causing inflation. This is because, in a recession, an increase in the money supply may just be saved, e.g. banks don’t increase lending but just keep more bank reserves.

6. Higher taxes

If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) that ignores the effect of temporary tax rises/decreases.

CPI-CT is less volatile because it ignores the effect of taxes. In 2010, some of the UK CPI inflation was due to rising taxes.

7. Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

8. Profit push inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.

9. Monetary and fiscal policy

The attitude of the monetary authorities is important; for example, if there was an increase in AD and the monetary authorities accommodated this by increasing the money supply then there would be a rise in the price level.

Related

• Different types of inflation
• The link between devaluation and inflation
• Why printing money causes inflation

According to New York (CNN Business) America is finishing the year with decades-high inflation. That doesn't predict well for 2022.

Prices have gone so high it will take some time for them to come back to their lesser intensities. In other words, the discomforting inflation of 2021 will likely stay with us this whole year as well.

The most recent price data had proven two of the most watched inflation measures — the consumer price index and the personal consumption expenditure index — each climbed to a 39-year high.

The latter index is what the Federal Reserve pays the most attention to when assessing the nation's inflation.

There's some room for optimism: The central bank, which is tasked with keeping prices stable, is rolling back its pandemic stimulus and is expected to raise interest rates next year to tame inflation and stop the economy from overheating.

And last month's data actually showed that prices increased at a slower rate in November than in October for both the CPI and the PCE indices. That's good news, even though the slowdown was small at only 0.1 percentage points.

But here's the thing: Economists prefer to look at price movements over a period of time, usually 12 months. So a small slowdown like November's won't move the needle just yet.

In fact, it might take months for these incremental slowdowns to show up in the data. After a year of prices soaring on high demand and supply chain chaos, a lot of big numbers are baked into the 12-month data set. Even if inflation suddenly falls off a cliff, it would take time for the leading indices to reflect that. This is what Fed Chair Jerome Powell is talking about when he mentions "base effects."

Why will inflation remain high?

Several factors are keeping prices elevated.

One is the supply chain chaos that came to a head last summer. Even though some bottlenecks have eased, the issues are not fully resolved. And as long as it's more expensive — and takes more time — to move goods around the world, higher transport costs will likely be passed down to consumers.

Another big contributor is the high cost of commodity prices, leading to surging energy and food costs. Prices in both sectors have soared this year and added a good chunk to the inflation we have already seen. In the case of food, high prices have forced some consumers to buy less or switch stores.

Economists don't expect that to get any better next year. Aside from high demand and shipping costs, rising prices for fertilizer and continued bad weather could keep food prices high even as other pandemic fueled inflation pressures ease.

Rising rents also remain a concern. This is important because housing represents a big percentage of what people spend money on. If rents eat up a bigger piece of the pie, consumers might wind up spending less, which would be bad news for the recovery.

In November, rent rose 0.4% for the third month in a row, according to economists at Bank of America, and that points to higher and more persistent inflation going forward.

The "recent broadening of inflationary pressure has coincided with a notable pickup in rental inflation," said Peter B. McCrery, economist at JPMorgan, "which jumped to its highest monthly rate in 20 years in the September CPI report and has stayed firm since then."

And then there's Omicron.

Several countries, including the United States, have seen record high Covid-19 infections in recent weeks because of the rapidly spreading variant. If this leads to a new round of lockdowns, it could once again change the way consumers spend and boost demand for stay-at-home goods.

Perhaps more importantly, Omicron could impact energy prices: If restrictions return and people travel less, the lowered energy demand would mean prices ease, and that would help bring inflation back down.

Worldwide Inflation by Country 2022

It’s not just the United States that is suffering from high inflation, countries worldwide are experiencing higher than average inflation.  This is partially due to the global pandemic but even more the result of the actions taken by central banks in response to the pandemic. In this article, we will look at global inflation rates by country and inflation around the world.

The World Inflation Rate

The average inflation rate around the world is 7.4%. The global inflation rate surged from 4.35% in 2021, and 3.18% in 2020.

Jump to:

·         Countries with the Highest Inflation Rates

·         Countries with Hyperinflation

·         Russian Inflation

·         Inflation in Europe

·         EU Inflation Rate

·         Inflation in China

·         African Inflation Rate by Country

Countries with the Highest Inflation Rates

The top countries with the highest inflation are the typical group of suspects. The top ten have suffered from hyperinflation consistently even when the rest of the world had very low inflation rates. As of this writing, Sudan is the country with the highest inflation rate in the world at 260%. But we have to remember that these are the “official inflation rates” the actual real-life inflation experienced by consumers could easily be much higher or even double the official rate. The country with the second-worst inflation rate in the world should also be no surprise… Venezuela. Apparently, as we projected the Venezuelan foray into crypto currency didn’t solve their inflation problem. Number 3 is Lebanon which is alsosuffering a repeat performance of hyperinflation. Syria has the 4th highestinflation in the world and we wrote about its hyperinflation back in 2013. Number 5 is Zimbabwe which has suffered from the worst hyperinflation off and on this entire millennium. Although it is well below the 2.2 million percent that it once was.

Back in February, we wrote about the Massive Gap between Official Turkish Inflation and Reality. We have to remember that as Milton Friedman once said, “inflation is always and everywhere a monetary phenomenon”

Although below 10% inflation the relationship is weaker. But governments consistently want to blame anything else besides their misguided monetary policies for the advent of hyperinflation in their country.

Countries with Hyperinflation

Although it is difficult to say at what point high inflation becomes “hyperinflation” we have listed the top 10 inflation countries as “countries with hyperinflation in 2022”. These countries all have inflation rates above 30%.

Country	Inflation Rate	Reference Date
Venezuela	500%	September 2022
sudan	273%	September2022
Lebanon	180%	September 2022
Syria	139.46%	September 2022
Zimbabwe	98.5%	September2022
Turkey	69.97%	April 2022
Suriname	61.5%	January 2022
Argentina	58%	April 2022
Ethiopia	36.6%	April 2022
Iran	35.6%	April 2022

The second tier of high inflation countries includes Russia which shouldn’t be a surprise since countries typically experience high inflation during times of war since they tend to print money to finance their conquests. But these inflation numbers are from April so we can expect Russia to move up the inflation ladder in the weeks and months ahead as Sanctions against Russia have a greater effect.

Country	Inflation Rate	Reference Date
Sri Lanka	29.8%	April 2022
Moldova	27.1%	April 2022
Angola	25.79%	April 2022
Haiti	23.95%	January 2022
Ghana	23.6%	April 2022
Cuba	23.3%	January 2022
Estonia	18.8%	January 2022
Russia	17.8%	April 2022
Sierra Leone	17.59%	February 2022
Nigeria	16.82%	April 2022

Inflation in Europe

European inflation has been on the upswing like most of the rest of the world in 2022. The worst European inflation occurred in (as we’ve already mentioned) Turkey, Moldova, Estonia, and Russia. Although Lichtenstein appears last on this list, it is important to note that its numbers are from December, when the whole world had lower inflation rates. It is also interesting to note that in April Great Britain aka. The United Kingdom at 9% has a higher annual inflation rate than the United States at 8.3%. Due to its strict fiscal monetary stance, the Swiss inflation rate is still it's typical 2.5%, however.

COUNTRY	INFLATION RATE	REFERENCE DATE
Turkey	69.97%	Apr/22
Moldova	27.1%	Apr/22
Estonia	18.8%	Apr/22
Russia	17.8%	Apr/22
Belarus	16.8%	Apr/22
Lithuania	16.8%	Apr/22
Ukraine	16.4%	Apr/22
Bulgaria	14.4%	Apr/22
Czech Republic	14.2%	Apr/22
Romania	13.76%	Apr/22
Latvia	13%	Apr/22
Poland	12.4%	Apr/22
Slovakia	11.8%	Apr/22
Kosovo	11.2%	Apr/22
Montenegro	11.2%	Apr/22
Macedonia	10.5%	Apr/22
Bosnia and Herzegovina	10.2%	Mar/22
Greece	10.2%	Apr/22
Netherlands	9.6%	Apr/22
Serbia	9.6%	Apr/22
Hungary	9.5%	Apr/22
Croatia	9.4%	Apr/22
United Kingdom	9%	Apr/22
Cyprus	8.8%	Apr/22
Belgium	8.31%	Apr/22
Spain	8.3%	Apr/22
European Union	8.1%	Apr/22
Euro Area	7.4%	Apr/22
Germany	7.4%	Apr/22
Austria	7.2%	Apr/22
Iceland	7.2%	Apr/22
Portugal	7.2%	Apr/22
Ireland	7%	Apr/22
Luxembourg	7%	Apr/22
Slovenia	6.9%	Apr/22
Denmark	6.7%	Apr/22
Sweden	6.4%	Apr/22
Albania	6.2%	Apr/22
Italy	6%	Apr/22
Finland	5.7%	Apr/22
Malta	5.4%	Apr/22
Norway	5.4%	Apr/22
France	4.8%	Apr/22
Faroe Islands	4.4%	Mar/22
Switzerland	2.5%	Apr/22
Liechtenstein	1.5%	Dec/21

EU Inflation Rate aka. European Inflation Rate

The European Union (EU) inflation rate is 7.4%. If, as we’ve already said, inflation is a monetary phenomenon, how can various EU countries have different inflation rates? According to the European Central Bank (ECB) “The euro area economies have experienced a considerable degree of inflation rate convergence during the past decade.” So having the same Central Bank has tended to stabilize the individual European country’s inflation rates. But each country still has control over its own spending, borrowing, and taxation policies but they can’t set their own interest rates, which creates stresses within the EU financial system. It is also important to note that NOT all EU Countries use the EURO so they may not even have the same currency.

Looking at individual European debt to GDP ratios we see that Greece is the highest at 193%, Germany is in the middle at 69.3%, and Estonia is the lowest at 18.1%.

Country	Uses the Euro	Inflation Rate	Debt/GDP %
Austria	Yes	7.20%	82.80%
Belgium	Yes	8.31%	108.00%
Cyprus	Yes	8.80%	104.00%
Estonia	Yes	18.80%	18.10%
Finland	Yes	5.70%	65.80%
France	Yes	4.80%	113.00%
Germany	Yes	7.40%	69.30%
Greece	Yes	10.20%	193.00%
Ireland	Yes	7.00%	56.00%
Italy	Yes	6.00%	151.00%
Latvia	Yes	13.00%	44.80%
Lithuania	Yes	16.80%	44.30%
Luxembourg	Yes	7.00%	24.40%
Malta	Yes	5.40%	57.00%
Netherlands	Yes	9.60%	52.10%
Portugal	Yes	7.20%	127.00%
Slovakia	Yes	11.80%	63.10%
Slovenia	Yes	6.90%	74.70%
Spain	Yes	8.30%	118.00%
Bulgaria	No	14.40%	21.10%
Croatia	No	9.40%	79.80%
Czech Republic	No	14.20%	41.90%
Denmark	No	6.70%	36.70%
Hungary	No	9.50%	76.80%
Poland	No	12.40%	53.80%
Romania	No	13.76%	48.80%
Sweden	No	6.40%	36.70%

Inflation in China

Chinese inflation is one of the lowest inflation rates in the world at 2.1% as of April 2022. However, like in many other countries, the official China Inflation Rate may not represent real-life inflation i.e., what actual Chinese consumers pay. Some of China’s neighbors on the other hand still have very high inflation, especially the “Stan countries”.  Kyrgyzstan 14.5%, Pakistan 13.4%, Kazakhstan 13.2%, Turkmenistan 12.45%, and Uzbekistan 10.38%. Inflation for other Chinese neighbors includes Mongolia at 14.4%, Georgia at 12.8%, and Myanmar at 12.63%.

Other Asian Inflation Rates

The Philippine inflation rate is relatively moderate at 4.9%, South Korea has 4.8%, and Thailand has 4.65%. At the lower end of the inflation scale, Japan has a national inflation rate of only 2.5%, Vietnam has 2.64%, Malaysia has 2.2%, and Hong Kong has 1.7%.

Countries with the Lowest Inflation

South Sudan (not to be confused with Sudan) had massive deflation with prices actually falling by -8.52% over the year. Bolivia had less than 1% annual inflation and the Maldives and Macau had just over 1% inflation. But beware, many of the low inflation countries on this list haven’t reported since last December (or earlier) so their actual inflation rate could be much higher by now.

COUNTRY	LAST	REFERENCE
South Sudan	-8.52	December 2021
Bolivia	0.87	April 2022
Vanuatu	0.9	September 2021
Maldives	1.05	March 2022
Macau	1.07	March 2022
New Caledonia	1.2	December 2021
Liechtenstein	1.5	December 2021
Afghanistan	1.56	June 2021
Hong Kong	1.7	March 2022
Benin	2	April 2022
China	2.1	April 2022
Brunei	2.2	December 2021
Malaysia	2.2	March 2022
Seychelles	2.2	April 2022
Saudi Arabia	2.3	April 2022
Cameroon	2.37	September 2021
Bermuda	2.5	February 2022
Japan	2.5	April 2022
Switzerland	2.5	April 2022
United Arab Emirates	2.5	December 2021
Eritrea	2.6	December 2021
Vietnam	2.64	April 2022
Oman	2.67	April 2022
Central African Republic	2.7	December 2021
Ecuador	2.89	April 2022
Equatorial Guinea	2.9	December 2021
Gabon	2.9	March 2022
Swaziland	3.3	February 2022
Taiwan	3.38	April 2022
Indonesia	3.47	April 2022

African Inflation Rate by Country

As we showed above, many of the highest inflation countries are in Africa including Sudan, Zimbabwe, and Ethiopia. South African inflation is pretty much middle of the road at 5.9%.

COUNTRY	LAST	REFERENCE
Sudan	260%	January 2022
Zimbabwe	96.4%	April 2022
Ethiopia	36.6%	April 2022
Angola	25.79%	April 2022
Ghana	23.6%	April 2022
Sierra Leone	17.59%	February 2022
Nigeria	16.82%	April 2022
Burundi	16.09%	April 2022
Malawi	15.7%	April 2022
Burkina Faso	15.1%	April 2022
Egypt	13.1%	April 2022
Guinea	12.42%	March 2022
Sao Tome and Principe	12.1%	February 2022
Gambia	11.69%	April 2022
Zambia	11.5%	April 2022
Mauritius	11%	April 2022
Rwanda	10.5%	April 2022
Algeria	9.6%	February 2022
Botswana	9.6%	April 2022
Mozambique	7.9%	April 2022
Cape Verde	7.6%	April 2022
Togo	7.5%	April 2022
Tunisia	7.5%	April 2022
Lesotho	7.2%	March 2022
Guinea Bissau	6.5%	January 2022
Somalia	6.5%	April 2022
Kenya	6.47%	April 2022
Madagascar	6.34%	February 2022
Senegal	6.2%	March 2022
Mauritania	6.1%	February 2022
Morocco	5.9%	April 2022
South Africa	5.9%	April 2022
Libya	5.7%	March 2022
Namibia	5.6%	April 2022
Liberia	5.44%	November 2021
Uganda	4.9%	April 2022
Niger	4.89%	December 2021
Ivory Coast	4.5%	March 2022
Mali	4.5%	January 2022
Congo	3.99%	November 2021
Tanzania	3.8%	April 2022
Djibouti	3.61%	March 2022
Comoros	3.59%	September 2021
Chad	3.5%	March 2022
Swaziland	3.3%	February 2022
Equatorial Guinea	2.9%	December 2021
Gabon	2.9%	March 2022
Central African Republic	2.7%	December 2021
Eritrea	2.6%	December 2021
Cameroon	2.37%	September 2021
Seychelles	2.2%	April 2022
Benin	2%	April 2022
South Sudan	-8.52%	December 2021

Articles Linked Above:

·         What is Hyperinflation?

·         Can Crypto Solve Venezuela’s Hyperinflation?

·         Hyperinflation strikes Lebanon… Again

·         Syria’s Hyperinflation

·         Zimbabwe Inflation 2.2 million Percent

·         Zimbabwe Switches to the U.S. Dollar

·         Hyperinflation in Turkey and Argentina Today

·         Sanctions against Russia

 

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World Inflation Data Courtesy of Trading Economics where you can view the full list of Nations and their inflation rates.