Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes. It is the opposite of disinflation. It can refer to an economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country's output.
This can possibly be achieved by methods that include reducing tax, changing the money supply, or even adjusting interest rates. Just as disinflation is an acceptable antidote to high inflation, reflation is considered to be an antidote to deflation (which, unlike inflation, is considered bad regardless how high it is).
Originally it was used to describe a recovery of price to a previous desirable level after a fall caused by a recession. Today it also (in addition to the above) describes the first phase in the recovery of an economy which is beginning to experience increasing prices at the end of a slump.
Friday, January 22, 2010
Stagflation
Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.
The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965.
The concept is notable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started.
Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.
This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inappropriate macroeconomic policies.
For example, central banks can cause inflation by permitting excessive growth of the money supply.
The government can cause stagnation by excessive regulation of goods markets and labor markets together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s.
It began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral
The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965.
The concept is notable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started.
Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.
This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inappropriate macroeconomic policies.
For example, central banks can cause inflation by permitting excessive growth of the money supply.
The government can cause stagnation by excessive regulation of goods markets and labor markets together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s.
It began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral
Hyperinflation
hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value.
[1] Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month."
[2] In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium." A vicious circle is created in which more and more inflation is created with each iteration of the cycle.
Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss.
Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.
[1] Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month."
[2] In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium." A vicious circle is created in which more and more inflation is created with each iteration of the cycle.
Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss.
Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.
Disinflation
Disinflation is a decrease in the rate of inflation. This phase of the business cycle, in which retailers can no longer pass on higher prices to their customers, often occurs during a recession. In contrast, deflation occurs when prices are actually dropping.
To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the the supply of money which resulted in an increase in prices. But, in more recent years, the word inflation has come to mean the result rather than the cause. i.e. an increase in prices rather than an increase in the supply of money. This might be partially the result of the wide spread usage of the term "inflation rate" which measures the rate of price increases rather than the increase in the money supply.
Disinflation on the other hand is a more recent term and so only has the connotation of moderating prices i.e. prices that are not increasing as quickly as they once did. For example if the annual inflation rate one month is 5% and it is 4% the following month, prices disinflated by 1% but are still increasing at a 4% annual rate.
Disininflation can continue at that rate for four more months until the inflation rate is zero. At that point, disinflation becomes deflation as prices are now decreasing. The tricky part is that during the month that annual prices were disinflating, monthly prices may actually be deflating.
To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the the supply of money which resulted in an increase in prices. But, in more recent years, the word inflation has come to mean the result rather than the cause. i.e. an increase in prices rather than an increase in the supply of money. This might be partially the result of the wide spread usage of the term "inflation rate" which measures the rate of price increases rather than the increase in the money supply.
Disinflation on the other hand is a more recent term and so only has the connotation of moderating prices i.e. prices that are not increasing as quickly as they once did. For example if the annual inflation rate one month is 5% and it is 4% the following month, prices disinflated by 1% but are still increasing at a 4% annual rate.
Disininflation can continue at that rate for four more months until the inflation rate is zero. At that point, disinflation becomes deflation as prices are now decreasing. The tricky part is that during the month that annual prices were disinflating, monthly prices may actually be deflating.
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