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Inflation is the devaluation of a country's currency, which leads to an increase in prices. The essential difference between inflation and general price increase: general price increase refers to the temporary, partial and reversible price increase of a commodity due to the imbalance between supply and demand, which will not cause currency depreciation; Inflation is a sustained, universal and irreversible rise in the prices of major domestic commodities, which will lead to the devaluation of a country's currency.
The direct cause of inflation is that the amount of money circulating in a country is greater than its effective economic aggregate. The direct reason why a country's currency in circulation is greater than its effective economic aggregate is that the growth rate of a country's base currency issuance is higher than its effective economic aggregate. The reasons why the growth rate of a country's base money issuance is higher than its effective economic aggregate include monetary policy and non-monetary policy. Monetary policy includes loose monetary policy and adjusting economy through interest rate exchange rate; Non-monetary policies include loan inflation caused by the financial system dominated by indirect investment and financing, excessive long-term export surplus of international trade, excessive foreign exchange reserves, speculative monopoly, corruption and waste, increased social transaction costs, reduced quality of economic development, unbalanced economic structure and misleading consumption expectations.
Therefore, inflation is not only a monetary phenomenon, but also an important reason for inflation. Whether it is monetary policy or non-monetary policy, monetary phenomenon or real economy bubble, the fundamental reason of inflation is that the GDP growth mode leads to too high GDP moisture, too large ineffective economic aggregate and a serious shortage of effective supply, which leads to the decrease of monetary efficiency.
The difference with deflation:
1. The meaning and essence are different: inflation refers to the economic phenomenon that the circulation of paper money exceeds the amount needed for circulation, causing the devaluation of paper money and the rise of prices. Its essence is that the total social demand is greater than the total social supply; Deflation is an economic phenomenon opposite to inflation. It refers to an economic phenomenon that the overall price level has been declining for a long time and the currency has been appreciating continuously during the period of relative economic contraction. Its essence is that the total social demand is less than the total social supply.
2. Different performance: The most direct performance of inflation is the depreciation of paper money, rising prices and declining purchasing power. Deflation is often accompanied by declining production, shrinking market, declining profit rate of enterprises, decreasing production investment, increasing unemployment, decreasing income and weak economic growth. Mainly manifested in the low price, the price of most goods and services fell.
3. Different causes: The main reason for inflation is that the total social demand is greater than the total social supply, and the currency circulation exceeds the actual amount of money needed in circulation. The main reason of deflation is that the total social demand is less than the total social supply, and the long-term industrial structure is unreasonable, making it difficult to form a buyer's market and export.
4. Different harmfulness: Inflation directly devalues paper money. If the income of residents remains unchanged, the living standard will decline, resulting in social and economic life disorder, which is not conducive to economic development. However, in a certain period of time, moderate inflation can stimulate consumption, expand domestic demand and promote economic development. Deflation leads to price drop, which is beneficial to residents' life, but it will seriously affect investors' confidence and residents' consumption psychology in the long run, leading to vicious price competition, which is unfavorable to long-term economic development and people's long-term interests.
5. Different control measures: The most fundamental measure to control inflation is to develop production and increase effective supply. At the same time, we should take measures such as controlling money supply, implementing moderately tight monetary policy and fiscal policy of living within our means. To control deflation, we should adjust and optimize the industrial structure, comprehensively use investment, consumption, export and other measures to stimulate economic growth, implement a proactive fiscal policy, a prudent monetary policy and a correct consumption policy, and adhere to the policy of expanding domestic demand.