Structural inflation is inflation that results from changes in the structure of demand and supply. Under the influence of changes in the structure of demand and supply, some branches will experience an increase in demand for their products, while in the case of others, this demand will fall. If prices and wages in branches reducing their production will be inflexible towards this reduction, while prices and wages in branches increasing production will increase, then the overall level of both prices and wages in the economy will grow. The discussed phenomenon will become stronger when the supply will be inflexible and will not be able to adapt immediately to the changes taking place.
The main reasons
Thus, structural inflation arises when producers can not adapt their production structure in an efficient manner in response to changes in the structure of the economy. These changes may concern:
The discussed inflation may also appear when the general structure of what the consumers, companies or even the government are demanding will change suddenly and producers will not be able to easily change the structure of resource involvement, and thus the structure of production itself. In addition, it can also be triggered by implementing significant innovation. changes in the structure of the economy cause the emergence of strategic deficiencies and the emergence of the so-called bottlenecks in supply channels. If the supply for any good suddenly increases and it will be such a bottleneck, its price it will also be higher, and this increase will be transferred to the prices of many products for which it is needed.
Rapid structural changes in the economy may lead to both acceleration of structural inflation and the increase in structural unemployment connected with it. One example of such a situation is the specific "North-South" division that occurred in the UK economy in the second half of the eighties. At the same time, when the northern regions of the country struggled with the problem of high structural unemployment, caused by the continuing collapse of traditional industries, there were large surpluses in demand in the southern regions. This caused a rapid increase in income of various groups of people and enterprises. Due to the fact that many prices and wages are set at a uniform level throughout the country, inflation that initially occurred in the south also spread very quickly to the north.
Advantages of Structural inflation
Structural inflation can have some positive effects on the economy:
- It encourages economic growth and development as it increases the production of certain goods. This can lead to an increase in employment and wages, as well as higher economic output in the long run.
- Structural inflation can also be beneficial for certain social groups. It can help reduce poverty levels, as the higher prices of some goods and services can lead to an increase in the purchasing power of certain households.
- It can also encourage innovation and technological progress. As the demand for certain products increases, businesses will have to find ways to increase their production and efficiency. This can lead to the development of new technologies and processes, which can benefit the whole economy.
- Finally, structural inflation can also help to reduce the cost of borrowing. By increasing the prices of goods and services, businesses can increase their profits, leading to a greater capacity to borrow and invest.
Limitations of Structural inflation
Structural inflation can have several limitations that should be taken into consideration when assessing its effects on an economy. These include:
- Rigid wages: Structural inflation can be exacerbated by rigid wages that do not adjust to changes in the structure of demand and supply. As a result, wages may remain too high for a declining industry, further reducing its competitiveness.
- Insufficient supply: Structural inflation can also be caused by an insufficient supply of goods and services that cannot meet the new demand. This can lead to high prices and inflationary pressures.
- Inefficient allocation of resources: Structural inflation can be due to an inefficient allocation of resources, which results in some sectors being over-supplied while others are under-supplied. This can lead to an inefficient use of resources and may be damaging to the overall economy.
- Changes in preferences: Changes in consumer preferences can lead to structural inflation, as some industries may experience a decrease in demand while others experience an increase. This can lead to an increase in prices and wages, and further inflationary pressures.
A one-sentence introduction to the other approaches related to Structural inflation is that there are various other factors that can contribute to the phenomenon. These include:
- Increased government spending – If governments increase their spending beyond what is necessary for economic stimulation, this can cause inflationary pressures in the economy.
- Expansionary fiscal policy – Expansionary fiscal policy is the use of government spending to increase overall economic activity. If done too aggressively, it can lead to inflationary pressures in the economy.
- Increased money supply – An increase in the money supply can lead to higher prices and wages, which can in turn lead to structural inflation.
- Weak productivity growth – Productivity growth is an important factor for economic growth. If productivity growth is weak, it can lead to higher prices and wages, which can cause structural inflation.
- Structural imbalances – Structural imbalances in the economy can lead to inflationary pressures. For example, an imbalance between supply and demand can lead to higher prices and wages.
In summary, structural inflation is caused by a combination of factors, such as increased government spending, expansionary fiscal policy, increased money supply, weak productivity growth and structural imbalances. These factors can lead to higher prices and wages and can contribute to the phenomenon of structural inflation.
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- Argy, V. (1970). Structural inflation in developing countries. Oxford Economic Papers, 22(1), 73-85.
- Yeldan, A. E. (1993). Conflicting interests and structural inflation: Turkey, 1980-1990. The Pakistan Development Review, 303-327.