Inflation — Causes, Types and Consequences
What is inflation? - The definition\
inflation describes a sustained increase in general price levels of goods and services, leading to a gradual Reduction of purchasing power leads. In other words, consumers get less for the same amount than before. This phenomenon can be visible (open inflation) when prices rise, or hidden (hidden inflation) when the quality of products and services decreases without prices falling. A moderate rise in prices is a desired phenomenon in the economy; the Swiss National Bank SNB's inflation target range is 0-2% (https://www.snb.ch/de/the-snb/mandates-goals/monetary-policy/strategy). On the other hand, persistently high inflation leads to problems because it loses price stability.
What is the difference between inflation and deflation?
While inflation reduces purchasing power, describes deflation the opposite effect: Prices fall over a longer period of time, resulting in a Increasing the value of money leads. Consumers can afford more for the same amount. As a result, purchases and investments are postponed because consumers are waiting for further price reductions, which reduces demand and increases the fall in prices. Companies are also deferring investments due to falling profit expectations. This can result in a deflationary spiral that leads to a self-reinforcing downward economic spiral that is difficult to break and can result in a deep recession or depression.
How does inflation occur?
The causes of inflation are manifold. Some of the most common triggers include:
- Increased production costs: When prices for raw materials or energy rise, for example, these costs lead to higher end user prices, which is Cost inflation is referred to as.
- Demand-related inflation: If demand for certain goods rises without a corresponding increase in supply, prices rise. This could result, for example, from an easing of the monetary policy of the Swiss National Bank (SNB) when it provides money to stimulate the economy. This effect is particularly strong when the state also massively increases its spending on economic development.
- Supply-related inflation: Supply chain restrictions or scarcity of raw materials lead to higher prices. This form of inflation is often temporary but can last longer if problems are not resolved.
What is hyperinflation?
Hyperinflation is an extreme form of inflation in which Price increases rapidly and take place regularly. There is no generally valid but widespread definition by Phillip D. Cagan (1956), according to which one speaks of hyperinflation when the inflation rate 50% or more per month amounts to. Consumers quickly lose confidence in the currency and prefer to invest their money in tangible assets such as real estate or precious metals to protect their savings. Hyperinflation can severely destabilize the economy and trigger social unrest.
What is the effect of inflation?
Benefits of Inflation
Inflation can also have positive effects for certain groups. This includes:
- debtors: Your debts lose their real value because the repayment becomes “cheaper” due to inflation.
- Staat: The value of government debt decreases as inflation rises, provided that the inflation rate is above the interest rate on the debt.
- Consumer sentiment: Slight inflation means that people are positive about spending money or investing.
Disadvantages of inflation
At the same time, there are many who experience disadvantages as a result of inflation, in particular:
- Workers, pensioners and savers: Purchasing power falls because income and savings are worth less. This applies in particular to pensioners with fixed incomes.
- undertakings: Increasing production and labor costs increase cost pressure, which companies often offset by higher product prices. Banks can also be reluctant to lend in uncertain times, which can stagnate investments.
Key indicators: HICP and LC
Certain indices are used to measure inflation and to assess the general price level. In Switzerland, this measures Federal Statistical Office (BFS) which consumer prices with the National Consumer Price Index (LIC). Internationally, EU and EFTA countries use the Harmonised index of consumer prices (HICP)to compare price developments in different countries.
For example, the LIK in Switzerland was in April 2023 106.0 points, which represents an increase of 2.6% over the previous year. At the end of 2023, the LK showed a decrease of 0.2% compared to the previous month and stood at 106.2 points. Such fluctuations are often caused by factors such as seasonal price adjustments, e.g. in the hotel industry or when traveling abroad.
A sound understanding of inflation and its effects can help to better assess economic decisions and take precautionary measures that promote both short-term and long-term financial stability.
What does inflation mean for property value?
When money has less value, the value of tangible assets rises. Real estate is therefore considered a very good hedge against inflation, as rental prices and real estate values tend to rise with inflation. In the case of existing loans, inflation can also be beneficial as the real value of the debt decreases.
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