What is inflation?

According to what has been published in Banco de México

According to what has been published in Banco de México

 

The term inflation we hear, we see or read every day, on the radio, on television, in the newspaper and when we do, the first idea that comes to mind is … We have already raised prices.

Through this article we will try to explain more thoroughly what it is about, what its consequences are and what the citizen can do to mitigate its effects.

 

 

What is Inflation?

The definition of this term according to economists is “The generalized and sustained increase in the prices of goods and services in the market over a period of time, usually one year.” It is not necessary to go into much detail because itself the definition is quite clear and simple to understand, however, the question would be: Why do the prices of goods and services in a market increase in a generalized and sustained manner?

 

, which is responsible, among other things, for establishing the Monetary and Inflation Policies of this country, inflation has two types of determinants or causes, long and short term , and this classification is it establishes in function to the time in which these delay in impacting the inflation, being the impact of those of short term in a period minor to a year and those of long term in a greater period.

Among the long-term impact are the Excess of Money , this happens when the Central Bank prints more bills than the population demands for the purchase of goods and services. The Fiscal Deficit is when the government’s expenses are greater than its income, so to cover the difference, it uses loans from the Central Bank, which once again puts the ticket machine to work to make this loan and is ready, as if for magic, again there is more money in circulation and therefore inflation, do you sound familiar ?, and finally are the Inconsistent Policies where by decree, ignoring the free market, the government decides to index some prices of goods and / or service and / or wages to inflation, that is, if inflation raises the salary increases in the same proportion, this most people would think is good, BUT IT IS NOT , because what happens is that the formula is used again magic of the little money machine and again there is more money circulating which favors more inflation, the latter is known as the inflationary spiral.

On the short-term side, the first determinant is the Contraction of the Aggregate Supply , the aggregate supply is the total volume of goods and services produced by an economy. When an input of generic use in any industry increases its price, for example an increase in the price of oil this causes a transfer of the cost to the consumer or a decrease in production in which case both cause an increase in the price of the products. products, that is, inflation.

Another determinant in the short term is the increase in aggregate demand , the aggregate demand is the volume of goods and services required by an economy. Therefore, an increase in aggregate demand greater than the goods and services that the economy can produce, causes an increase in prices, since there is a lot of money chasing a few goods. What happens in this case is that many consumers buy more goods and services than before, to notice this phenomenon companies increase the prices of their products, which causes inflation.

On the other hand, there are interest rates , which represent an important tool that the central bank has to control the growth of money and therefore inflation, is the interest rate. The mechanism works in the following way: a higher interest rate reduces aggregate demand by discouraging investment and consumption, increasing people’s savings; in this way the amount of money available in the economy is limited, with which the price level decreases. The opposite happens when the interest rate decreases; now people are encouraged to invest and consume, since having money in banks is not the best option, so the amount available in the economy is increased, which makes the price level increase.

Finally, a Credible Inflation Policy is very important, where an economy is considered in which prices and wages are established based on inflation expectations (that is, in the perception of what agents believe will happen in the future), a credible policy of the central bank should have as a priority the control of inflation and help anchor the expectations that the public have about it.

As it can be inferred, Inflation is an extremely important economic indicator in the Economic Policies that a country proposes, in Mexico a punctual measurement of this indicator is taken since 1929 with the Food Price Index of Mexico City which included 16 generic concepts. The INPC (National Consumer Price Index) began to be developed in 1969, considering 7 cities and 5,100 products and services. Currently 83,500 goods and services are grouped into 315 types of products that represent family consumption in 46 cities distributed in 7 regions throughout the country. Each state represented by at least one City.

In general terms arguably the ideal for a country’s economy is to keep inflation below 3% being one of the objectives of any monetary policy, in Mexico in 2015 inflation was 2.13%, in 2014 was 4.08% , but for example, in 1995 inflation was 51.97% (http://www.banxico.org.mx/dyn/portal-inflacion/index.html).

We can now infer that inflation is not good for the pocket of Mexicans because it reduces the value of the purchasing power of money. What does this imply? It implies that if our salary does not increase at least by the same percentage as inflation, we are losing purchasing power and therefore quality of life since every time we reach for less. Paradoxically, it is not a solution to index the salary to inflation since, as we had previously commented, this would create an inflationary spiral, which in the long run would be much more damaging for the economy since it would not only cause the inflationary effect but also the loss of jobs, increase in the exchange rate, etc.

At this point most should be thinking, so what can I do? Actually as citizens we can not do anything to move inflation, this is like a wave, if you stand in front of it, you wallow, a wave is surfing, this in real terms from day to day tells us that while We can not do anything for this indicator if we can do something for our pockets. Here are some examples of what we can do to affect us as little as possible.

  • Be cautious with spending, that is, do not buy what you do not need in an indispensable way.
  • You have to learn to buy, and here surely everyone thinks, but if it is very easy, I choose the product or service, I pay and it is ready, and they are right, however I mean being smart when buying, for example, if I already know that I will need notebooks and shoes for the return to school in September, the previous 2 or 3 months will surely have higher prices on these products (supply and demand), what I should do is buy them in the first quarter of the year in Where prices will surely be lower, the same in some seasonal products, for example fruits and vegetables, there are times of the year when certain products are more scarce, so in those moments you have to suspend your purchase and look for a substitute food that if it is in season in order to buy cheaper. This is what I call smart shopping.
  • If we depend only on a salary, we are CONDEMNED without any salvation to be victims of inflation and see year after year decrease our quality of life, so it is advisable to resort as much as possible to saving and investment to take care of ourselves to continuously increase our income through some additional business, and with this I do not mean that we have to be the new Starbucks, I mean that a small business selling food (cakes, tamales, hamburgers, etc.) can replace the inflationary decrease and can even generate surprisingly high incomes (this depends on you) even higher than our salary.
  • Above all use your common sense, and think easy, after all no one can achieve different results by always doing the same.

   

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