What is inflation and deflation?

The rapid rise in prices for goods and services has had a significant impact on most households not only in Poland but throughout the world. The uncertain political and economic situation is visible every day. High prices for food, gas, electricity and fuel make life difficult for Poles. Borrowers have no reason to be happy either, because rising interest rates actually doubled their monthly payments. What does inflation look like? What exactly is this phenomenon that we are facing? Is deflation the antidote to all the evils of inflation? What are the consequences of these two economic phenomena?

Inflation - what is it?

Inflation is one of the phenomena in the economy when we are dealing with a decrease in the purchasing power of money. This is due to the simultaneous rise in prices for goods and services, which in practice means that for the same amount we will buy much less than before inflation.

We can calculate inflation based on the consumer inflation index, i.e. CPI. This is an abbreviation of the English name “consumer price index”. These calculations are made on the basis of retail prices for goods on the market in a given month, and on the basis of the so-called consumer basket. In other words, this basket includes all the goods that were purchased by one sample household during the entire year. Thus, we can calculate the monthly and annual increase in inflation.

Currently, according to statistics from the Central Statistical Office, inflation in Poland is at 15.5% (data as of July 2022). According to economists, this figure has not increased since June, but this is not yet sufficient reason to expect a decrease in inflation. Economists at mBank say that inflation may peak in autumn this year due to the launch of state programs, including the payment of the 14th pension and the extension of the anti-inflation shield. The situation with food prices is also uncertain - much depends on the resumption of exports in Ukraine, which has practically ceased due to the current military situation.

Types of inflation

It is worth knowing that we distinguish between several types of inflation, which were identified depending on the causes and degree of ongoing inflationary processes. It should be noted, however, that inflation itself in its original form is not a negative phenomenon, but is even a phenomenon that stimulates the country’s economic growth. Inflation is present in our lives most of the time, but its rate is so small that we do not feel its presence. The problem begins when the rate of inflation rises alarmingly fast and the rate exceeds the allowable percentage ceiling. It is because of these intensity processes that we can distinguish several types of inflation:

• Creeping inflation is the typical economic situation discussed above, in which slight inflation becomes the driving force behind the economy. However, its rate cannot exceed 5% per annum.

• Sliding inflation is a slow increase in the annual inflation rate from 5 to 10%. This is the moment when some more anti-inflationary measures can be introduced, but their success depends, in particular, on the reasons for the rise in prices.

• Galloping inflation - inflation rates in this case grow very quickly and exceed 10% per year. This type of inflation is already having a negative impact on the economy and is being felt in the daily lives of citizens.

• Hyperinflation is the result of the collapse of the country’s economic system. There is an immediate rise in prices with a simultaneous fall in the value of money.

In addition, we can also separate inflation for the causes of inflationary processes. At the same time, they distinguish:

• Demand-pull inflation is caused by too much money in circulation. This is one of the most common causes of inflation. This leads to an increase in demand that supply cannot keep up with. Thus prices go up.

• Cost inflation - an increase in the cost of producing goods, an increase in prices for the goods themselves.

• Structural inflation is a combination of the above two types of inflation, caused both by the situation in the world market and in the domestic market.

Deflation - what is it?

The process opposite to inflation is called deflation. What is it about? Deflation is when prices fall. This is an increase in the purchasing power of money, often referred to as negative inflation. Thanks to falling prices, we can buy the same amount more than before deflation. This may sound positive, especially to consumers, but as with inflation, too high a level can have serious economic consequences. Prolonged and high deflation can lead to economic stagnation caused by a reduction in production due to its unprofitability and an increase in unemployment, and hence the costs allocated by the state to social programs.

To prevent such a development of the situation, states should focus their economic attention on maintaining a constant inflation target, of course, at a low level, which helps to keep disinflation at a level acceptable to citizens, and not threatening the economic situation of the country.