Attempts to master it are rather unsuccessful. Especially the desire to put a ceiling on some prices, is taken as a trap, into which no manufacturer or marketer is willing to jump.
What is that??
Here's the ECB's explanation of inflation: In a market economy, the prices of goods and services can always change. Some are promoted, others are downgraded. We are talking about inflation, when there is a general increase in the prices of goods and services, and not just some individual items. This means, that for 1 euro today you can buy less than yesterday. In other words, over time, inflation reduces the value of money.
Who's pushing the brakes
The outlook for the global economy has worsened this year in the face of chronically high inflation, rising interest rates and the uncertainty resulting from the collapse of two major US banks, said the International Monetary Fund. What can you do, to overcome these difficulties as well?
Who pays how
Inflation is the only form of punishment without legal basis, assures Milton Friedman. There are only two great powers, to worry about: growth and inflation, Ray Dalio thinks. Printing money does not create jobs, but only more inflation - warns Margaret Thatcher. Here are other statements by economic analysts: Inflation is a form of tax, tax, which we all collectively have to pay. Inflation can be defined as prosperity with deadly dangerous blood pressure.
of lung volume and this is seen on computed tomography, not everyone is a loser, but most…
Say, that inflation is like toothpaste - has it come out of the tube, it can hardly be turned back. Still, at least let's close the cap.
Three economists explain what is being done, when inflation takes over:
The best measure is to increase economic growth
A positive effect is obtained, when the central bank, the parliament and the government conduct a restrictive fiscal policy in sync.
Inflation is associated with the cyclicality of the economy, she is a phenomenon, which periodically happens. The reasons may not be only pro-cyclical, and it is not always a question of "overheating" of the economy. In fact, inflation is a discrepancy between the mass of money in circulation and GDP. The discrepancy may result from an expansion of the money supply, but also from a contraction of economic activity, and this is no longer overheating.
How inflation gained speed in Bulgaria
The period of the pandemic was combined with a long-lasting political crisis in our country. No regular or caretaker government lasted a full calendar year, and frequent elections led to populism. So the measures to fight inflation, involving a contraction of the money supply in circulation, were combined with measures to increase incomes and catch up with average incomes in the EU. The pandemic has disrupted global supply chains and increased a number of basic resources in international markets. Even the combination of these two causes can explain the combination of internal and external factors, which multiplied the inflation in Bulgaria above that in the Eurozone.
How the price bubble inflates
Unreasonable behavior of regulators in Bulgaria. Price cap announcements, excess profit tax, regulation of markups lead to a deficit. And it leads to consumer inflation, which gradually turns into built-in inflation, in economic terms. Another factor is the divergence between the manufacturing and financial sectors. The hyper-liquidity of financial intermediaries, the presence of unregulated payment and investment instruments such as cryptocurrencies, combined with over-indebtedness of the manufacturing sector and problems with public capital expenditure may explain this divergence.
The effect of anti-inflationary measures
The increase in the main interest rate in the EU, and in Bulgaria with over 2% leads to an excess of the neutral value and a brake on the investments of the companies follows. Central banks are forced to do so, but corporate loans are becoming more expensive to a severe level and the GDP growth forecast in our country for 2023 G. is for 1.4%, and for the euro area under 1%.
In the Eurozone, fiscal expansion has been observed in the context of inflation, and Bulgaria rather lacks fiscal anti-inflationary measures, which is a mistake. Parliament hands out money generously, which do not increase GDP and do not lead to investment in the economy. And nominally increased incomes quickly lose purchasing power, and this action becomes meaningless.
Measures, which have yielded results
The first anti-inflationary measure, which gives a result, is the Currency Board, but we have already used it.
The second best measure is increasing economic growth. But nothing is being done in this direction.
Third, employment growth. There is a slight statistical confusion here for the layman. Yes, unemployment is 4.1%, but it is measured against the active labor force. In Bulgaria, however, there are almost 1 million people - healthy, of working age, but officially they are not working. Hardly absolutely all of them are in the gray economy. If these people flow into the labor market, this will quickly bring down inflation and stabilize the economy.
To tame inflation
Something simple can be done: the restrictive monetary policy of the BNB to be synchronized with the restrictive fiscal policy of the parliament and the government. There is currently async between them.
Another action is continuing the regulation of energy prices, including medium-term measures, such as increasing the diversification of energy supplies.
To maintain a level of high effective competition in all sectors. There, where there are deviations, to have an immediate reaction from the antitrust authorities. The underdeveloped capital market is also a problem.
The role of central banks
The experts know, that the central bank has at least 8 the main instruments for conducting monetary policy in the conditions of inflation. Even with monetary advice they are at least 4-5. These instruments should be aimed at reducing consumer demand to the level of contraction of the money supply in equilibrium with GDP. Unions claim, that consumer demand drives the economy, but hardly with a nominal increase in income, consumers choose only Bulgarian goods and thus stimulate only the Bulgarian economy. Corporate investment should be stimulated through appropriate credit conditions. This supports Bulgarian companies and increases their export potential, which would significantly increase economic growth. It all depends on the construction of monetary policy actions, conducted by the BNB.
The position of the state, when prices are steadily going up
The state must have good expertise for the sustainable conduct of economic policy. When cyclical and exogenous shocks are superimposed, as it is now, the genesis of the inflationary phenomenon must be considered. At the onset of double-digit inflation, the state took action, which are suitable when the economy is overheating. At the same time, elements of stagflation were observed, although they did not turn into true stagflation. This led to the retention of inflation in Bulgaria at high levels, which exceed those of the Eurozone. The removal of the excess money supply from circulation in such a case must be combined with stimulation of the production sector. Energy support for companies is far from covering this criterion.
Winners and losers
Paradoxically, but the most profitable during inflation is the state, because the internal debt is automatically reduced. Asset holders also benefited, which in periods of inflation increase in value – eg investment gold, interesting real estate. And the biggest losers are the savers, and these are usually the elderly. Everyone with large mortgages is a loser, made in calmer times, without leaving a reserve in their income. Part of the companies, who sell luxury goods are also losers, because consumers in periods of inflation limit their consumption.
The invisible hand of the market
Inflation usually occurs when a financial bubble is inflated. After he cracked, the financial sector shrinks to the level, in which it manages to balance with production. There are winners and losers in this process.
Let's clear up a problem, we will solve it
Part of the successful formula for controlling inflation: More childcare, pro-immigration policies, measures to improve wages and working conditions
The debate about the causes of inflation continues. Accurate identification of the causes is important, because if they are not properly recognized, it can be mistaken for measures to tame it. In my opinion, inflation is mostly due to reduced supply, while demand growth plays a secondary role. The decline in supply is explained by problems in the operation of supply chains, caused by the pandemic and the war in Ukraine. Because the reasons are supply-side, solutions to control inflation should be sought in the same direction – measures, supply related.
Voices are heard, that the government should take a course towards a sharp tightening of fiscal policy through across-the-board spending restraint. However, limiting budget spending will not lead to a greater supply of food or fertilizer, nor will it diversify the sources and routes of gas and crude oil supplies, and therefore will have a dubious effect on inflation. Instead, the across-the-board contraction in budget spending will inflict unnecessary additional pain on households. And considering, that Bulgaria is the country with the weakest social protection system in the EU, the pain will be greatest for poor and marginalized populations. This is a problem, because:
"High inflation reduces the purchasing power of income asymmetrically, with the negative effect being greatest for households with the lowest incomes'.
The consequences of such a policy choice are easy to foresee. The inequalities, which have already reached very disturbing proportions, they will further intensify, and threats to social peace will increase. Instead, well-targeted fiscal policies and other fine-tuned structural measures will have a better chance of taming inflation.
An important point is the EU countries' total purchases of gas and crude oil. This may help, because while all the countries of the world consume gas and crude oil, the extraction and production of these important raw materials for the modern economy is highly concentrated. Additionally, consumers are disadvantaged by the existence of cartels, such as OPEC. The consequences:
"Foreign consumers often have producers against them, which have almost unlimited power to control product prices, that sell. One way to counter this is for users to band together as well, to increase market power, with which they have".
In some countries, like France for example, the state reached an agreement with large retail chains to offer certain goods at lower markups, in order to protect low-income consumers. At the same time, retail chains are free to apply higher markups to other goods, for example, such as are consumed by
households with deeper pockets
Something similar was done in the US, where the administration reached an agreement with drug manufacturers to limit price increases for some medications. And here, like France, producers can increase the prices of other products more, thus free to cover their costs and continue to make a profit.
The Bulgarian interim government tried the same with the proposal for a "Law on the ceiling of the markup of 17 basic types of food'. From the market fundamentalist camp, they were quick to declare the initiative "unmarket" and "reminiscent of the time of socialism". according to me, the measure is good and will produce the desired results, if voted by parliament and implemented by the next regular government. It will be important:
“The ceiling on markups to be applied to a limited number of products, so that it can be administered without too great an increase in costs, both for business and the public sector".
Another initiative by the interim government, that of a food price monitoring platform, was also criticized as "ill-conceived" and "burdening business with new obligations", while at the same time doubts were expressed, that can help reduce specula. In my opinion, this measure of the interim government is also good and will help to reduce speculation, if applied. She's counting on it, that sometimes it's enough just to shine a light on a problem, to solve it. For some merchants, it will be important not to end up on lists, identifying them as engaging in unfair trading practices and they will correct their behaviour. For other merchants, this will not matter and they will continue to work as before. To predict today the effect of this measure is close to impossible, as well as, it is likely to be very difficult to measure this effect ex post facto. This should not discourage us, as the measure does not appear to involve large costs, and the potential benefits, especially when combined with the action of other measures, maybe they will be worth it.
“Labor shortages also drive inflation, as it contributes to an increase in the price of labour'.
And the answer to that from a policy perspective should be increased childcare provision, so that more mothers can return to employment more quickly, and of course pro-immigration policies and measures to improve wages and working conditions, to make the country more attractive to immigrants.
A higher minimum wage would also help, because it will increase incentives to participate in the labor market, and will reduce the incentives for the low-skilled workforce to emigrate to other EU countries, where the purchasing power of minimum wages is higher than in Bulgaria. Legislation, to make jobs more attractive, especially for women and pensioners, who want to work, may also be helpful.
In cases of price increases due to excessive pricing power, better enforcement of antitrust legislation should be considered.
"The rapid rates of increase in the gross operating surplus in some sectors of the economy indicate, that the increased concn, may be among the factors contributing to the increase in inflation in some product markets".
The reduced rate of VAT for certain goods is not a well-functioning measure, because its benefits rarely go to consumers. To the extent that any tax changes can be used to reduce the negative effects of inflation, it is worth considering abolishing the proportional taxation of household income and moving to a progressive tax scale. This makes sense for many reasons, but in the context of high inflation, may also be useful, as it will help mitigate the asymmetric effect of inflation on the purchasing power of income, where the negative effects are greatest for the lowest income households. In order not to interfere with efforts to limit the budget deficit to approx 3% of GDP, this can be done in a way, neutral for budget revenues, with the decline in revenues from reduced taxation of low-income groups being offset by increased revenues from taxation of middle- and high-income households.
"The design of the electricity consumer support scheme needs to change".
Based on material from economic.bg