Galloping inflation

From CEOpedia | Management online

Galloping inflation - The process of steadily rising prices and costs in the economy is known as inflation. As seen by the amount of money and the number of items that can be purchased, inflation reduces the purchasing power of money. When indicators rise by 30-40% annually and inflation rates are growing quickly, this is referred to as galloping inflation or jumping inflation (Urban, Urbanek, 2015), however Paul A. Samuelson stated that the inflation can be perceived as galloping inflation even up to 200% per year, then the hyperinflation starts.

An overview

Three primary reasons of inflation are identified by economists:

According to the cost theory, the rise in production costs that results from wage increases without a corresponding rise in employee productivity is what causes inflation. This particular sort of inflation is also brought on by rising monopolistic firm profits, higher taxes, and rising import prices. On the other hand, the demand theory postulates that inflation results from a rising in the demand for products and services on a global scale and happens when all the available production resources have been utilized. The monetary theory holds that the rise in an economy's money supply above the pace of growth in real income is what causes inflation (Urban, Urbanek, 2015).

Typical causes of galloping inflation

There are several causes of galloping inflation (Salim, 2019):

  • Increase of money supply - happen most of the times when governments financed spending in a crisis by printing money.
  • Demand-pull effect - An increase of wages of workers lead to increase of the purchasing power of them, then the sellers raise the price level and as a result incorrect balance of supply and demand occurs.
  • Cost-push effect - When company's cost of production will rise. Cost of manufacturing includes rising input prices for things like labour or raw materials. The businessmen will attempt to maintain their profitability by increasing prices for the consumer in order to pass along the increased cost of production.
  • Increase in public expenditure - Public spending on infrastructure development and welfare services, in particular, must expand under all systems of governance, not just democratic ones. The demand for goods and services rises as a result. So, the vendors try to boost the price at which they are selling their items. Through public works initiatives, there is a transfer of purchasing power to the households.
  • Increase in exports
  • Increase in population
  • Reduction in taxation
  • Increase in consumer spending

Consequences of galloping inflation

Galloping inflation, while getting out of control of the government in a given country, can cause substantial changes in the relationship between prices and products. This has negative impact on functioning of the market structure.

There are several negative outcomes of galloping inflation (Zawiślińska, 2014) :

  • decline in the purchasing power of money
  • an escape from money
  • the appearance of the illusion of money
  • a decline in real income of people with a fixed income and savings
  • a necessity of maintaining high interest rates
  • increase in public spending,
  • an increase in the cost of financing public debt.

There are also positive effects of inflation (Salim, 2019):

  1. Higher revenues and profits - When inflation is mild, businesses are able to increase their prices, revenues, and profits. Pay increases are something else that workers may anticipate. This might increase investment and provide psychological enhancements.
  2. Tax revenues - Through "fiscal drag effects," the government benefits from inflation. The quantity of tax money pouring into the treasury decreases as prices rise.
  3. Cutting the real value of debt - Moderate inflation, as well as low and stable inflation, aids in lowering the Real Value of outstanding Debt.
  4. Avoiding deflation - One advantage of positive inflation is that it helps an economy avoid some of the negative consequences of a deflationary recession.

Galloping inflation force the entrepreneurs to quit the country fighting with galloping inflation. Such situation turns the heads of investors to buy foreign currencies and take long-term loans with fixed interest rates.

Examples of galloping inflation in history

In the year 1994 some European countries fought with galloping inflation, those were (Ghosh, 1997):

  • Estonia (41.6%)
  • Lativa (26.2%)
  • Lithuania (45%)
  • Moldova (116%)
  • Russia (202.7%)

Advantages of Galloping inflation

Galloping inflation can have some advantages, such as:

  • It can help to reduce real interest rates, as nominal interest rates are usually higher than inflation. This can create incentives for businesses to invest more and stimulate economic activity.
  • It can help to reduce the burden of debt, as the amount of debt owed decreases in real terms as inflation rises.
  • It can help to increase the competitiveness of domestic firms, as prices can rise faster than those of their foreign competitors.
  • It can help to reduce the real cost of wages, making labor more attractive and spurring employment.

Limitations of Galloping inflation

Galloping inflation can have a variety of negative effects on an economy. Some of these limitations are as follows:

  • High prices and costs can lead to a decrease in consumer spending, as they struggle to be able to afford basic necessities. This can then cause a decline in economic activity.
  • Inflation can also lead to an increase in unemployment, as businesses struggle to keep up with the rising prices. This can further exacerbate the economic downturn.
  • The purchasing power of money is decreased with inflation, meaning that savers and investors can see a significantly reduced return on their investments.
  • Inflation can also lead to a decrease in the value of local currency, resulting in an increase in foreign debt and a decrease in international competitiveness.
  • When galloping inflation reaches a certain level, it can lead to economic chaos, as the economy is unable to manage the instability created by constantly rising prices and costs.

Overall, galloping inflation can have a variety of negative effects on a country’s economic health and can create an atmosphere of economic instability.

Other approaches related to Galloping inflation

  • Fiscal policy actions: The government is able to influence the economy by using fiscal policy actions such as increasing taxes or reducing government spending. This affects the amount of money circulating in the economy, which can help to control galloping inflation.
  • Monetary policy actions: The Central Bank can also influence the economy by using monetary policies such as setting interest rates or changing the money supply. This can help to control galloping inflation by making it more expensive to borrow money, reducing demand and increasing the value of money.
  • Price controls: The government can also use price controls to limit the amount of money that businesses can charge for goods and services. This helps to prevent prices from rising too quickly, which can help to control galloping inflation.
  • Supply-side policies: Supply-side policies such as reducing business regulations and promoting entrepreneurship can help to increase economic growth and reduce galloping inflation.

In summary, there are several approaches that can be used to control galloping inflation, such as fiscal and monetary policy actions, price controls, and supply-side policies. Each approach has its own benefits and drawbacks, so it is important for governments to consider the most effective policy for their particular situation.


Galloping inflation — recommended articles
Deflation gap — Disinflation — Demand shock — Crowding out effect — Economic forces — Underconsumption — Price control — Expansionary monetary policy — Damping effect

References

Author: Kacper Szymski

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