INFLATION

According to public understanding, inflation is a condition which produces a rising

trend in the general price level in the economy. Inflation is also a situation where
there is ‘too much money chasing too few goods’. Vengedasalam, Deviga and
Madhavan, Karunagaran (2013). Principles of Economics: Inflation. Selangor: Oxford
Fajar Sdn. Bhd.

DEFINITION OF INFLATION
Inflation can be defined as a continuous increase in the general price of level of goods
and services in the economy. Since inflation refers to a continuous increase in the
general price level , although the price of every product and service need not increase.
For example, if the inflation rate is 4%, it does not mean that all prices are increasing by
4%. It is only average increase. Inflation leads to a decline in the value of money.
“Inflation means that your money won’t buy as much today as you could yesterday.”
Vengedasalam, Deviga and Madhavan, Karunagaran (2013). Principles of Economics:
Inflation. Selangor: Oxford Fajar Sdn. Bhd.

MEASURES OF INFLATION
The consumer price index (CPI) is used to measure the rate of inflation. The consumer
price index (CPI) is an index that measures changes in the average price of consumer
goods and services. The CPI is also called the cost of living index. The rate of inflation is
computed as a percentage change in the CPI from one year to the next. The following
formula shows how the rate of inflation is computed. Vengedasalam, Deviga and
Madhavan, Karunagaran (2013). Principles of Economics: Inflation. Selangor: Oxford
Fajar Sdn. Bhd.

Inflation Rate = CPI this year – CPI previous year

CPI previous year

For example, given that the CPI for the year 2000 was 121 and that for the year 2001,
110, the inflation rate using the above formula would be:

Inflation Rate = 121 – 110 x 100 = 10%

110
CAUSES OF INFLATION
1. Demand-Pull Inflation
Demand-pull inflation is the most familiar form in inflation. Demand-pull inflation
occurs when aggregate demand (AD) exceeds the aggregate supply (AS). It is
caused by a rise in AD which may be due to rise in consumer demand or an
increase in the level of government expenditure, or a rise in investment by
firms, or an increase in demand for the country’s exports by people in foreign
countries or a combination of the four.
Aggregate demand exceeds aggregate supply at full employment. If all the
available resources are already fully employed, the economy is attempting to
produce beyond its capacity and as a result, the spending pulls the price level
upwards. The essence of demand-pull inflation is that there is ‘too much money
chasing too few goods’. Vengedasalam, Deviga and Madhavan, Karunagaran
(2013). Principles of Economics: Inflation. Selangor: Oxford Fajar Sdn. Bhd.
2. Cost-Push Inflation
Cost-push inflation refers to an increase in the general price level associated
with an increase in the cost of production. Cost-push inflation is the result of the
sellers’ activities. In other words, inflation occurs due to the increase in the
costs or supply prices of goods caused by an increase in the cost of inputs.
Vengedasalam, Deviga and Madhavan, Karunagaran (2013). Principles of
Economics: Inflation. Selangor: Oxford Fajar Sdn. Bhd.
a) Wage-push inflation
Wage-push inflation occurs due to an increase in the wage level
which will lead to an increase in the cost of production and the output
price. The wage level may increase due to organized labour unions
seeking further wage increases through their collective bargaining
strength or the firm’s increasing wages to avoid the migration of
workers to other firms.
b) Profit-push inflation
Profit-push inflation occurs when certain producers or monopolists
stock up on goods and create an artificial shortage which will increase
the price on these goods, thereby giving them higher profits.
c) Import-push inflation
Import-push inflation occurs when the prices of imported raw
materials or finished good increase. This may be due to the
fluctuation of the foreign exchange rate. This will lead to an increase
 in production costs and eventually an increase in the price of
outputs.

EFFECTS OF INFLATION
A continuous substantial rise in the general price level is injurious to the community’s
social economic interest, in terms of current welfare and future economic
development. Inflation affects the consumers’ real disposable personal income and
their expenditure pattern because the money value has fallen and lesser goods can be
purchased. Vengedasalam, Deviga and Madhavan, Karunagaran (2013). Principles
of Economics: Inflation. Selangor: Oxford Fajar Sdn. Bhd.

1. Distribution of Income
Inflation changes the existing pattern of distribution of income and wealth in society
where some groups are relatively better off than others.
The people who stand to gain from continuous inflation are:
a) Businessmen who earn higher profits from rising prices.
b) Property owners such as real estate owners who gain when property prices
increase during an inflation.
c) Shareholders who receive higher dividends since companies’ profits are higher.
d) Debtors because the real value of money has changed.
The people who tend to lose from continuous inflation are:
a) People dependent on fixed incomes such as salaried workers and pensioners.
b) Holders of government bonds, holders of fixed deposits in banks and holders of
life insurance policies and money.
c) Creditors because when they receive the money owed to them, the real value of
the money will be less.

2. Savings
During inflation, the value of fixed deposits, bonds, life insurance policies and money
would depreciate in terms of real income. Real income is the purchasing power of that
money as measured by the quantity of goods and services that can be purchased with
it. Since inflation depreciates the value of fixed deposits, people will save less and
invest in non-financial sectors such as houses and land.
3. Production
During inflation, the general level of prices rises and producers make higher profits
(providing they hold old stocks). This will lead producers to increase their level of
production and investment. Increased production and investment will create more job
opportunities and reduce unemployment.

4. Balance of Trade
During inflation, many countries face a deficit balance of trade since imports are
greater than exports. This arises when the prices of domestic products increase, as
this makes them less attractive to foreigners thereby leading to a reduction in the
demand for domestic products. At the same time, imports increase because the
imported products are now cheaper than domestic products.
INFLATION IN RUSSIA
In Russia, the transition to a market economy is difficult because the government is on
at the same time trying to change their economic and political system. Russia is a country
rich in natural resources. It has a population highly educated, cheap labor and also a large
consumer population. However, Russia is not able to attract foreign investors especially
in the manufacturing sector. It needs to keep up with the increase industrial growth
internally without foreign investment. Demand in Russia beyond expectations and
increased yields of some economies of transitional oil-producing countries have
contributed to better performance for transitional countries. GDNP is expected to record
stronger growth at 4.9% (19:99 2.4%). Russia's continued economic recovery into 2020
was driven by rising oil prices, with crude oil and natural gas accounting for a third of
exports. GDNP is expected to increase strongly to 7% (1999: 3.2%). Although the
inflation rate declined sharply compared to last year, it is expected to remain high at
18.6% (1999: 85.9%). This is due to the increase in local energy prices and the rapidly
growing supply of money resulting in an increase in overall price levels. High oil prices as
well as strong growth in non-oil exports have strengthened the external sector position.
The current account surplus amounted to 13.4% of GDNP (1999: 11.3% of GDNP).

In 2007, the World Bank stated that the Russian economy had achieved "unprecedented
macroeconomic stability". Russia is making progress in meeting its external debt
obligations. During 2000-01, Russia not only met external debt service, but also made
significant progress on principal payments on IMF loans, but also built Central Bank
proposals with government estimates, trade, and current account advantages. The TA
2002 estimates that the Russian government estimates that payments of about $ 14
billion in government debt service payments are due. Large-scale transactions have
brought rapid ruble appreciation over the last few years. This means that Russia has
given back many of the terms-of-profit-trade earned when the ruble fell 60% during the
debt crisis. Oil and gas dominate Russian exports, so Russia remains heavily dependent
on energy prices. Credits and interest rates on or below the inflation rate hinder the
growth of the banking system and make capital allocations and risks far more efficient
than they would otherwise. In 2003, debt increased to $ 19 billion due to higher
Department of Finance and Eurobond payments. However, this $ 1 billion has been
repaid in advance, and some of the private sector debt may have been repurchased.
Anonymous (2015) Online. Singapore: Singapore Press Holdings Ltd. Accessed 13
January 2021. https://www.beritaharian.sg/ekoniaga/inflasi-di-russia-tertinggi-dalam-
tempoh-16-tahun.
INFLATION GRAPH OF RUSSIA
 (INFLATION RATE OF RUSSIA FROM AUGUST 2019-AUGUST 2020)

The statistic shows the inflation rate in Russia from August 2019 to August 2020. The
term inflation means the devaluation of money caused by a permanent increase of the
price level for products (consumer goods, investment goods). The Consumer Price Index
shows the price development for private expenses and shows the current level of inflation
when increasing. In August 2020, the inflation rate in Russia was at 3.1 percent
compared to the same month of the previous year.
Anonymous (2020) Online. Russia Inflation Rate. Trading Economics. Accessed 7
January 2021. https://tradingeconomics.com/russia/inflation-cpi

INFLATION RATE OF RUSSIA

 (INFLATION RATE OF RUSSIA FROM 1995-2025)

The statistic shows the inflation rate in Russia from 1995 to 2019, with projections up until
2025. The inflation rate is calculated using the price increase of a defined product basket.
This product basket included the products and services, on which the average consumer
spends money throughout the year. They include expenses for groceries, clothes, rent,
power, telecommunications, recreational activities and raw materials (e.g. gas, oil), as well
as federal fees and taxes. In 2019, the average inflation rate in Russia was at about 4.47
percent compared to the previous year.
H. Pleacher (2020) Online. Russia: Inflation Rate from 1995 to 2025. Statista. com.
Accessed 25 December 2020. https://www.statista.com/statistics/271376/inflation-rate-in-
russia/