Chronic inflation – an economic phenomenon

Inflation is an economic term describing the sustained increase in prices of goods and services within a period. Chronic inflation is an economic phenomenon occurring when a country experiences high inflation for a prolonged period (several years or decades) due to continual increases in the money supply among other things. This type of inflation interrupts the economic activity and decreases the purchasing power of people.

Chronic inflation occurs when the inflation rate rises steadily from month to month over an extended period.

Thinkers instrumental in shaping contemporary economics do a major stocktaking of the field, and also look ahead at the challenges of global development. In countries with chronic inflation, inflation expectations become ‘built-in’, and it becomes extremely difficult to reduce the inflation rate because the process of reducing inflation by, for example, slowing down the growth rate of the money supply, will often lead to high unemployment until inflationary expectations have adjusted to the new situation. It distorts the economy and the domestic currency quickly losses its real value.

Chronic inflation is distinct from hyperinflation. To some, it signifies a struggling economy, whereas others see it as a sign of a prospering economy.

Occurrence

Chronic inflation has a profound negative impact on the long term investments of businesses. Even more so than hyperinflation, chronic inflation is a 20th-century phenomenon, being first observed by Felipe Pazos in 1972. High inflation can only be sustained with unbacked paper currencies over long periods, and before World War II unbacked paper currencies were rare except in countries affected by war – which often produced extremely high inflation but never for more than a few years. Most economists believe chronic inflation first emerged in Latin America following World War II, with the result that it was originally called “Latin inflation”. A number of countries have managed to sustain solid levels of economic growth for sustained periods of time with levels of inflation that would sound high by recent U.S. standards, like 10% to 30% per year.

Causes

An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. Monetarists state that chronic inflation is caused by chronic growth of the money supply, a position that is accepted by most mainstream economists. Unfortunately, the urge to spend and invest in the face of inflation tends to boost inflation in turn, creating a potentially catastrophic feedback loop. The causes alleged below are then things that cause the monetary authority to chronically engage in monetary growth. As people and businesses spend more quickly in an effort to reduce the time they hold their depreciating currency, the economy finds itself awash in cash no one particularly wants.

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