13. Give a summary of your home reading text unit 13

Pre-reading

1. Does Russia suffer from inflation?

2. Why do you think this is?

3. How does high inflation affect the whole economy?

1. Read and translate the text

Inflation and its features

Inflation is an overall increase in prices over a certain period of time. The rate of inflation is often in the headlines. There are lots of ways to measure inflation. One of the most popular ways is the retail price index. This is calculated by recording increases in price for a range of goods and services. This is sometimes called a basket of goods. Some of the goods are weighted more heavily than others because they are more important. Inflation is worked out from an average of all the price increases in the basket.

Inflation can happen for a number of reasons, but economists say there are two main culprits. These are demand-pull inflation and cost-push inflation. Demand-pull inflation can happen when the economy is growing fast. Aggregate demand begins to grow faster than suppliers can cope with. This causes a shortage, and prices rise. At first, customers may be able to pay the higher prices, and demand grows again. This forces prices up even more, and the cycle continues.

One of the characteristics of demand-pull inflation is that there is often too much money going round the economy. This is explained by the quantity theory of money. This theory uses the following equation: money supply x velocity = average price x transactions.

Velocity is the speed that money is passed on from one person to another. Some economists say that velocity and the number of transactions don’t really change. The only things that change in this equation are the money supply and average prices. This means that when money supply increases, prices will increase too.

Cost-push inflation, on the other hand, occurs when prices rise without an increase in demand. This happens when suppliers’ variable costs increase sharply. For example, workers may demand higher wages or raw materials may become more expensive. Producers then pass these increases on to consumers by raising prices.

The most immediate effects of inflation are the decreased purchasing power of the dollar and its depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys a little less each month. Those not on fixed incomes are more able to cope because they can simply increase their fees. A second destabilizing effect is that inflation can cause consumers and investors to change their speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases are high-risk investments, spending is diverted from the normal channels and some structural unemployment may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than borrowers during long inflationary periods which means that loans made earlier are repaid later in inflated dollars.

The inflation rate in Russia was last reported at 9.5 percent in February of 2011. Inflation rate (consumer prices): 6.7% (2010 est.); 11.7% (2009)

Year	Inflation rate (consumer prices)	Rank	Percent Change	Date of Information
2009	14.10 %	185	56.67 %	2008 est.
2010	11.70 %	202	-17.02 %	2009 est.
2011	6.70 %	167	-42.74 %	2010 est.

Definition: This entry furnishes the annual percent change in consumer prices compared with the previous year’s consumer prices.

From 1991 until 2010, the average inflation rate in Russia was 175.36 percent reaching an historical high of 2333.30 percent in December of 1992 and a record low of 5.50 percent in July of 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when inflation declines to lower levels). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time. Deflation is correlated with depressions – including the Great Depression, as banks defaulted on depositors. Additionally, deflation may cause the economy to enter a liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth. The effects of deflation are:

1. Decreasing nominal prices for goods and services

2. Increasing real value of cash money and all monetary items

3. Discourages bank savings and decreases investment

4. Enriches creditors at the expenses of debtors

5. Benefits fixed-income earners

6. Recessions and unemployment