Inflation is a phenomenon that has accompanied us since the beginning of money as a medium of exchange, and just a few people know exactly what inflation is and what it does. Therefore, this term paper will introduce the reader to inflation and whether there arise problems from low inflation.

The first part of this paper is about inflation, its effects, causes, and how it is measured. Then low inflation will be defined and afterwards the negative effect of inflation - deflation - will be explained and with several figures, a time of low inflation in the EU will be analysed and used as an example to show whether low inflation is a problem or not.

Excerpt

Häufig gestellte Fragen zum Thema: Ergebnisse niedriger Inflation in der Europäischen Union

Was ist der Inhalt dieses Textes?

Dieser Text ist eine umfassende Übersicht über das Thema Inflation, insbesondere niedrige Inflation und deren Auswirkungen. Er beinhaltet ein Inhaltsverzeichnis, Abkürzungs- und Abbildungsverzeichnis, eine Einleitung, Kapitel zu Inflation, den Folgen niedriger Inflation (inkl. Definition niedriger Inflation und Deflation), eine Analyse niedriger Inflationsperioden in der EU anhand verschiedener ökonomischer Kennzahlen, ein Fazit, Literaturverzeichnis und ein Anhang mit weiterführenden Datenquellen.

Was wird unter Inflation verstanden und wie wird sie gemessen?

Inflation beschreibt den Anstieg des Preisniveaus für Waren und Dienstleistungen. Gemessen wird sie mithilfe des Verbraucherpreisindex (VPI), des Produzentenpreisindex und des BIP-Deflators. Der Text erläutert die jeweilige Berechnungsmethode.

Welche Theorien zur Entstehung von Inflation werden im Text behandelt?

Es werden die keynesianische Theorie (Nachfrage- und Kosteninflation) und die Quantitätstheorie des Geldes (Inflation als monetäres Phänomen) behandelt. Die Quantitätstheorie beschreibt Inflation durch die Gleichung M x V = P x Y.

Welche Auswirkungen hat hohe Inflation?

Hohe Inflation führt zu Kaufkraftverlust, schadet Sparern, begünstigt Schuldner und kann im Extremfall zu Hyperinflation führen, wie am Beispiel Venezuelas illustriert. Hohe Inflation hemmt auch das Wirtschaftswachstum.

Wie wird niedrige Inflation definiert und welche Risiken birgt sie?

Niedrige Inflation wird im Text als Inflationsrate zwischen 0% und 1% definiert. Das Hauptproblem niedriger Inflation ist das Risiko der Deflation, die einen negativen Teufelskreis aus sinkenden Preisen, geringerem Konsum, weniger Investitionen und steigender Arbeitslosigkeit auslösen kann. Der Text erwähnt auch die Gefahr einer Liquiditätsfalle bei Deflation.

Wie wurde die Zeit niedriger Inflation in der EU analysiert?

Der Text analysiert eine Periode niedriger Inflation in der EU nach der Eurokrise (2014-2016). Anhand von Grafiken zur Inflationsrate, zum realen BIP-Wachstum, zur Arbeitslosenquote und zur Entwicklung der Nominal- und Reallöhne wird gezeigt, dass die niedrige Inflation in diesem Zeitraum keine negativen Auswirkungen auf die Wirtschaft hatte. Die positive Entwicklung der Kennzahlen deutet sogar auf eine steigende Konsumneigung hin.

Welche Rolle spielt die Europäische Zentralbank (EZB)?

Die EZB strebt eine Inflationsrate von etwa 2% an, um Wirtschaftswachstum und Preisstabilität zu gewährleisten. Der Text erwähnt die Maßnahmen der EZB zur Bekämpfung von Deflation und das Problem der niedrigen Zinsen (nahe 0%) als mögliche Einschränkung der Handlungsfähigkeit bei Deflation.

Welche Schlussfolgerung zieht der Text?

Der Text schlussfolgert, dass niedrige Inflation an sich kein Problem darstellt, solange sie nicht in Deflation umschlägt. Die Gefahr der Deflation stellt das Hauptrisiko niedriger Inflation dar. Die Analyse der niedrigen Inflationsperiode in der EU zeigt, dass positive Wirtschaftsentwicklungen trotz niedriger Inflation möglich sind.

Wo finde ich die im Text genannten Quellen?

Das Literaturverzeichnis und der Anhang enthalten detaillierte Angaben zu den verwendeten Quellen, inklusive Links zu Online-Datenbanken.

Table of content

I. Abbreviations

II. List of figures

1. Introduction

2. Inflation

3. Results of low inflation
3.1. How to define low inflation
3.2. Deflation
3.3. Time of low inflation in the European Union

4. Conclusion

5. References

6. List of annex

I. Abbreviations

CPI Customer price index

EU European Union

ECB European central bank

FED Federal Reserve Board

GDP Gross domestic product

II. List of figures

Figure 1: inflation rate in Venezuela

Figure 2: inflation rates in the EU

Figure 3: real GDP growth in the EU

Figure 4: unemployment rate in the EU

Figure 5: development of real wages in the EU

Figure 6: development of nominal wages in the EU

Figure 7: interest rates from the ECB

1. Introduction

Inflation - a phenomenon that has accompanied us, humans, since the beginning of money as a medium of exchange and just a few people know exactly what inflation is and what it does. Therefore this term paper will introduce the reader to inflation and whether there arise problems from low inflation.

The first part of this paper is about inflation, its effects, causes, and how it is measured. Then low inflation will be defined and afterwards the negative effect of inflation - deflation - will be explained and with several figures, a time of low inflation in the EU will be analysed and used as an example to show whether low inflation is a problem or not.

2. Inflation

In our capitalistic economy governments concentrate on a balance of economic growth and price stability. Therefore in a growing economy that is in the phase of the economic cycle like expansion or peak, prices for goods and services rise because of great economic performance, good expectations for the future, and the ability as well as the willingness of individuals to spend their money. This phenomenon is called inflation.

Basically, inflation is the reason why one could buy ice for 1€ in 2010 and today it costs 1.50€. So one sees inflation robs the consumer of their purchasing power and devalues money (Case, Fair and Oster, 2012, p. 100).

In order to do something about inflation governments and central banks need to know the amount of inflation at a certain time. So to measure inflation there is the consumer price index (Loria, 2018). A basket of goods that the majority of the population needs is bought at time 1 and again the same products are bought at time 2. Now economists can compare the prices and calculate the percentage with which the second basket was either more expensive or cheaper. The EU uses the harmonised index of consumer prices. In this context harmonised means that all EU countries use the same methodology to calculate the index so that they are comparable. This CPI shows the change in prices for the consumer. Additionally, there is also an index that depicts the change in prices from the producer's point of view, the producer price index. This one uses the cost of the producer's product before it gets to the customers. So again there is a basket of goods/services that is bought twice and then compared by experts.

Thirdly the gross domestic product deflator is also used to show the price change and therefore the inflation rate (Tolksdorf, 2021a). First, there is a base year and then one calculates the deflator. The nominal numbers are divided by the real numbers and then multiplied by 100. Now experts can compare the deflators and interpret the results.

In order to know how to use or counteract inflation the central banks and governments need to know how inflation arises and its effects on the economy. In Keynesian theory, inflation is explained through demand and supply (Sawyer and Arestis, 2006). If the demand for products is greater than the supply from the producers the price goes up, the so-called demand-pull inflation. Secondly, the costpush inflation happens when costs for production e.g. labour goes up. These increasing costs are relayed to the customer through increasing prices.

In the quantity theory of money, however, inflation is classified as a monetary phenomenon (Tolksdorf, 2021b). Inflation is explained with the help of the quantity equation, M x V = P x Y. While V, velocity of money and Y, GDP, are treated as constants only M, the quantity of money and P, price level are variables. So if the quantity of money is increased, the price level also increases since market prices are flexible and there is inflation. Since nominal figures include inflation and real numbers do not, one can increase/decrease the nominal numbers but in the end, the real figures will not be affected. Therefore money is just a tool of exchange and inflation is just a monetary phenomenon.

This phenomenon however can have huge effects on the economy and individuals (Bundesbank, 2016). The weakest members of society are overall harmed the most by inflation since they are affected the most by increasing prices and decreasing purchasing power. This harms the social cohesion of the state as well. People who save all their money in the bank also have a problem with inflation because their money loses value that they saved for retirement for example. In contrast to savers, debtors are in favour of inflation. The debt loses value as well so it is easier to pay back loans. However, if the inflation gets too high there is a high danger of hyperinflation meaning that prices rise very high in a very short time like in Germany 1923 or most recently in Venezuela (Bundesbank, 2016). In Figure 1 one can see that the inflation rate from 2017 to 2018 was ca. 65,374%. This high inflation decreases economic growth strongly (Altig, 2003). It is harder for companies to get loans from banks because they want securities that companies do not have, therefore fewer investments are resulting in even slower growth.

3. Results of low inflation

3.1. How to define low inflation

Central banks like the European central bank or the Federal Reserve Bank both want inflation to be around 2% in order to achieve economic growth but also price stability (ECB, 2021; Federal Reserve Board, 2016). Generally one can say that central banks around the world want inflation to be under 5% (Altig, 2003). Because of fear of hyperinflation the governments do not want inflation above this certain percentage. If the rate however decreases under 0% there is deflation which is also a problem. So the central banks have some borders that they want to avoid via monetary policy to achieve their goal but what about inflation rates that are between 0% and 1% are they optimal?

Therefore in the next paragraphs deflation will be explained and with the example of the European Union what effects the years with a low inflation rate of under 1% had on the European economy.

3.2. Deflation

While inflation is the increase of the price level in a certain period of time, deflation is the exact opposite. The general price level decreases and this has severe effects on economies and that is why central banks are afraid of too low inflation because the chances that it can lead to deflation are high (Fleckenstein, Longstaff and Lustig, 2013). In most economic depressions deflation played a major role in them like the great depression in the 1930s in the USA also leading to one in Germany (Fleckenstein, Longstaff and Lustig, 2013).

Since the prices are dropping consumers expect that the goods will be even cheaper in the near future and are therefore saving their money instead of spending it. So companies are making less profit in these times resulting in reduced production, rising unemployment because companies want to save costs so employees are fired and there are much fewer investments (Stüber and Beißinger, 2011). This leads to sinking income for consumers, more poverty, and even less consumption. Now the circle is repeating itself and it gets worse and worse with the time - a vicious circle. Additionally, the government loses a lot of money because the tax income decreases while the social expenses are rising. If you are a debtor in a time of deflation, one's debt is increasing and harder to pay back because of sinking income. So overall this price-deflation harms governments, companies, and individuals alike (Bundesbank, 2016). To fight deflation central banks need to increase the money supply via printing money or they increase the velocity of money transactions via lower interests rates (Bagus, 2015). While some economists today fear that deflation can lead to a liquidity trap in the state. This liquidity trap arises if during a deflation the nominal interests rates are already zero, the central bank can't lower them anymore, and with the purchase of bonds the deflation will just be prolonged instead of stopped. To find a way out of this vicious cycle is very hard and the ineffectiveness of monetary policy is feared by these experts (Bagus, 2015). There are also some economists nowadays who think there is good and bad deflation. Good deflation originates from a positive aggregate supply shock. This shocks results in a price decrease but increases the overall productivity. The bad inflation however comes from a negative demand shock resulting in excess supply and lower prices (Bagus, 2015).