What Is Inflation?

Simplest explanation of Inflation – Inflation is the rate at which prices for goods and services rise. How do economists count that rate? The most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price Index.

While it is easy to measure the price changes of individual products over time, human needs extend beyond just one or two products. So The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care.

2022 was challenging for EU economic, because Russia started a war in Ukraine, social and political crisis. If we check out the rates from the beginning of 2022, inflation rate in EU was 5.3% in January, then there is 10.1 % in August and the highest rate was recorded in October – 11.5%. While some experts say they’re hopeful that interest rates already hit their peak last year, others say the increases will likely continue into early 2023 until inflation is under control.

In Poland, the most important categories in the consumer price index are: Food and non-alcoholic beverages (24 percent of the total weight); Housing energy/maintenance (21 percent); Transport (9 percent); Recreation and Culture (7 percent). Alcohol and tobacco, Health, Other goods and services, and Clothing account for 6 percent each. Communication, Restaurants and Hotels, Household Equipment and Education account for the remaining 17 percent of total weight.

Poland’s consumer price inflation slowed to 16.6 percent year-on-year in December 2022, down from 17.5 percent in the previous month and an over 26-year high of 17.9 percent seen in October. The reading came in also below market expectations of 17.3 percent, but remained well above the central bank’s mid-point target of 2.5 percent, which might suggest policymakers will keep interest rates high for a long time. Prices rose at a slower pace for electricity, gas and other fuels (31.2 percent vs 36.8 percent in November), fuels for personal transport equipment (13.5 percent vs 15.5 percent), and food and non-alcoholic beverages (21.5 percent vs 22.3 percent).  

To sum up, inflation is not only negative event, but it is necessary for the economy, just keeping it on the targeted rate is important. An optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving. In times of low inflation rate (1%-5%), it is beneficial for the economy as it encourages people to buy more, because with lower inflation rate comes lower interest rate. Governments usually target for a CPI of 2%.

On the other hand, high inflation rates tend to cause uncertainty and confusion leading to less investment. It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth. In response to higher prices, the rich can reduce their level of quality of purchased goods, but the poor are already purchasing low-priced, low-quality goods. Their only reaction to inflation is to stop purchasing, thereby increasing the need gap. Higher inflation also leads to lower competitiveness with other countries, reduces the real value of savings, thereby affecting senior citizens who live on them.

Hope EU will find ways to stabilize the economy as they always use to do. Especially, it is well-known that after every crisis there are the periods of great economic growths.

Mariam

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