Inflation is due to the general increase in the prices of products and services . It is a percentage measure and indicates the trend of price growth in an economy.
To measure inflation, the current prices of a fixed quantity of goods are considered and compared with those of a previous period. Inflation exists when the average of current prices is higher than in the previous period.
This calculation is made every month and the aggregate values show the accumulated inflation for the year.
Very high inflation devalues a country’s currency and reduces the purchasing power of the population. In addition, it begins to create an unfavorable environment for investment and job creation.
Extremely high inflation is known as hyperinflation. Inflation, when it takes negative values, and there is a general decrease in prices, is known as deflation.
Understand what deflation is and what the risks are.
Main causes of inflation.
The increase in the prices of an economy can have several causes. We list the main ones below.
As the government spends, it contributes to inflation in the economy. Prices can be raised both by applying taxes passed to consumers and by monetary issues, printing money to pay for expenses.
Cartels or monopolies
The small number of companies that offer products or services in an economy makes them determine prices due to lack of competition. With price control in the hands of some companies, the trend is to increase the amounts charged.
Production and sales costs are passed on to consumers, as no company offers below its costs. The more they increase for companies, the more they contribute to inflation.
Production below demand in a market causes prices to rise, considering that there are consumers who are willing to pay more.
This is known for the natural increase in prices. Firms and workers predict inflation for the year and increase the amounts charged equivalent to purchasing power.
In the economy, indexation is the constant adjustment of prices considering previous inflation. It exists mainly in contracts and in the increase of wages.
How inflation is measured
In order to know the inflation of a country it is necessary that the Statistical or Economic Institutes collect samples of prices of products and services.
To define an inflation index, it is necessary to consider what audience will be studied and what goods and services these people will buy. This is done because inflation does not reach all consumers in the same way.
In Brazil there are different types of indices, some of them:
- Comprehensive National Consumer Price Index (IPCA) : Measured by the IBGE, this index considers the prices of goods purchased by families with incomes between 1 and 40 minimum wages in 11 metropolitan regions.
- National Consumer Price Index (INPC) : similar to the IPCA, this index considers inflation for families with incomes between 1 and 5 minimum wages.
- General price index – Market (IGP-M) : measured by the Getúlio Vargas Foundation (FGV), this index considers wholesale, retail and civil construction prices. Data is collected between the 21 of the previous month and the 20 of the reference month.
- General price index – Internal availability (IGP-DI) : similar to the IGP-M, this index measures the variation in prices of agricultural and industrial raw materials to goods and services for the final consumer. The difference is in the collection, which takes place between the first and the last day of the month.
Once the price collection is done, the technicians collect the data and calculate the percentage for the price variation, that is, the inflation index. This process is carried out by comparing the current prices with those of the previous period for the same quantity of products and services analyzed.
Know what it is and know the accumulated values for IGP-M and INPC.