From
the point of view of the average man the efficiency of country’s economy consists of several
factors, one of which is “increase in the overall level of prices” (Mankiw, p. 339) or inflation. If
prices grow while income levels remain the same or decrease, people start blaming its government and
financial authorities in poor economic policy, misallocation of resources and other sins (this is
also true in case of significant deflation). However, prices for most products are dynamic and very
on many factors. It is really difficult for the average man to assess the change in overall level of
prices.
In this essay paper we will explore the problem of hyperinflation and analyze the inflation rate in Great Britain over the past 10 years.
A person may notice the difference of 50 pence in price for gas if it grows within a short period of time (e.g. a week or two). But it is unlikely that we notice a slight change in price for stationery (e.g. 0.5-1% per month) which is not material for most people. For this reason government takes care of evaluation of the overall price level changes. “Economists measure the inflation rate as the percentage change in the consumer price index, the GDP deflator, or some other index of the overall price level” (Mankiw, p. 339) and the government publishes this information periodically.
Macroeconomics theory distinguishes several types of inflation depending on its rate. The most severe type of inflation is called hyperinflation. In case of hyperinflation price level may grow at more than 50% per month or even week. “International data show an even broader range of inflation experiences. Germany after World War I experienced a spectacular example of inflation. The price of a newspaper rose from 0.3 marks in January 1921 to 70,000,000 marks less than two years later” (Mankiw, p. 340). As a more recent example of hyperinflation and its consequences we can take an African country Zimbabwe. In October 2009 it was reported that “Zimbabwe’s inflation has rocketed to an astronomical 231 million per cent” (Telegraph). In 2008 the following information was relevant to Zimbabwe: “In February, the price of a loaf of bread in the country was less than 200,000 Zimbabwe dollars. On Monday, that same loaf of bread cost 1.6 trillion Zimbabwe dollars”(CNN International). It is unbelievable, but true.
In Great Britain the situation is incomparably better than is Zimbabwe and inflation rate is quite normal. The state did not suffer from hyperinflation within last decades. In order to illustrate this we can look at the consumer price index, taking the year 1997 as a base (100%). As it can be seen from the Table 1, within 12 years consumer price index inflated for 27% decreasing purchasing power of pound by almost one third since 1997. The peak of pound devaluation during this period falls to 2007-2008 when comparable change rate reaches 4 percentage points.
However, we should take into account that consumer price index (CPI) is calculated for a specific set of products, while in reality people may face significant price increase in a separate area, e.g. food or gas. In the year 2008 it was reported that “Inflation unexpectedly soared to 5.2% last month, the highest in 16 years, after power companies hiked gas and electricity bills … The main reason consumer price inflation topped 5% for the first time was sharp rises in utility bills.
Electricity prices were 30.3% higher on a year ago while gas prices soared by 49.9%. The annual rate of inflation for energy and other household bills hit 15%, the highest since January 1989” (guardian.co.uk). Although the overall price level growth did not exceed 5-6%, prices for electricity and gas hiked significantly, and the negative effect on the purchasing power of the Englishmen.
Again, in this particular case we do not deal with hyperinflation, but with a significant price growth in a separate area/industry.
After the strike of global financial crisis the British and world media actively discuss the potential outcomes and consequences of the recession. Most pessimistic fortunetellers claim that in Great Britain “under the weight of the exploding public sector debt mountain, deflation will fast turn towards hyper-inflation as the government literally prints money in ever more panic measures aimed at turning the economy around” (The Market Oracle). Indeed, it is difficult to estimate the total money emission made by developed countries in terms of fighting the recession and it is more difficult to forecast the consequences. The time will show.
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Works Cited
Mankiw, N. G. “Principles of Macroeconomics. Third edition”. Thomson, 2003.
Telegraph. Sebastien Berger. “Zimbabwe inflation hits 231 million per cent”. 9 October, 2009.
Accessed 10 October 2009,
<http://www.telegraph.co.uk/news/worldnews/africaandindianocean/zimbabwe/3167379/Zimbabwe-inflation-hits-231-million-per-cent.html>
CNN International. “Zimbabwe inflation hits 11,200,000 percent”. August 19, 2008. Accessed 10
October 2009,
<http://edition.cnn.com/2008/BUSINESS/08/19/zimbabwe.inflation/index.html>
Office for National Statistics. Statistical data on CPI and RPI. Accessed 10 October
2009,
<http://www.statistics.gov.uk/statbase/tsdtables1.asp?vlnk=mm23>
Guardian. Julia Kollewe. “Inflation soars to 5.2%”. 14 October, 2008. Accessed 10 October
2009,
http://www.guardian.co.uk/business/2008/oct/14/record-inflation
The Market Oracle. Nadeem Walayat. “Bankrupt Britain Trending Towards Hyper-Inflation?”.
November 28, 2008. Accessed 8 October 2009,
<http://www.marketoracle.co.uk/Article7526.html>