Is inflation reducing? Because prices don’t drop

One day my hairdresser asks me: “I don’t understand why if inflation goes down, prices don’t go down; and then I don’t understand why ifinflation it’s 5%, I go to the market and find courgettes …

Is inflation reducing?  Because prices don't drop

One day my hairdresser asks me: “I don’t understand why if inflation goes down, prices don’t go down; and then I don’t understand why ifinflation it’s 5%, I go to the market and find courgettes 20% more expensive!”. Excellent questions, which should be answered by trying to translate the more or less accurate information circulating on the subject. In his powerful “Dictionary of Economics (Utet – 1998)”, Sergio Ricossa he dedicates eight pages to the item “inflation” alone. There are things to say.

Let’s be content to tell our hairdresser that inflation is an index that measures growth, so if it decreases but remains positive it will mean that prices do not decrease, but they increase less. Furthermore, to calculate this index, a basket of different goods must be considered which will inevitably have different price trends, which will consequently influence the average trend of the index: “It is therefore a question of calculating an index number of the general level of prices absolute values ​​and to ensure that it fluctuates more or less around a stable average. Because if, however, this index number rises in the long term, the price system presents a pathological character, which is called inflation; while on the contrary if it decreases in the long term, the pathological character is called deflation. The rate of inflation or deflation is nothing other than the rate of change of the index number” (Ibid).

Having established that inflation is calculated with one or more average indices, it remains to consider what they are the factors that influence it. Generally speaking, the higher the demand for available goods, the more their prices tend to rise. The level of demand depends on many factors such as amount Of currency in circulation (on which private and public spending capacity depends) and the propensity to consume or save. The influence of external factors must also be considered, as in the case of “imported” inflation, i.e. generated by a country’s need to import, for example, raw materials or energy sources whose price could vary and consequently influence internal prices.

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The measures to try to intervene on the economic system, also influencing inflation levels, pass through maneuvers monetary policy (increase or reduction in the quantity of money in circulation through the management of emissions and the control of interest rates), of fiscal policy (through the increase, reduction or redistribution of public spending in relation to the trend of private spending), or by a combination of the two policies.

With the arrival of theories Keynesian the tendency has been increasingly to move towards fiscal manoeuvres, favoring a growing role for public spending, and often not correctly considering its interaction with private spending and with monetary policies: “The Keynesians will therefore incite to redistribute incomes in a more egalitarian to reduce the savings of the better off and expand the consumption of the less well off, but even better it was for the rulers, whose propensity to spend certainly exceeds private spending, to have the lion’s share. A big ‘social’ spending if well planned, it could rationalize the economy and remove capitalist defects. Unfortunately, however, it was like giving petrol to arsonists. Since the sixteenth century, public spending tended to expand more than national production, then to meet the needs of the nascent absolute state. Parliamentary democracy, which later emerged to control spendthrift sovereigns, had ended up replacing them in the multiplication of state tasks and disbursements that are all too easy. And Keynesian political suggestions, unintentionally(?), contributed to pushing along this slippery slope, making it more than ever an inflationary slope” (Sergio Ricossa, Let’s learn the economy – BUR 1994).

In times of crisis we resort to public spending “because there is a crisis”, while in the best periods we resort to public spending to avoid political unpopularity. The bottom line is that it’s never time to heal (reducing and spending more efficiently) public finances but, indeed, it is always the time to be creative with a new “free” bonus that destabilizes some economic sector, creates inflation and speculation by inflating prices out of all proportion, and increases spending public: “the State pays” a lot! is also on Whatsapp. Simply click here to subscribe to the channel and always be updated (free).