Inflation of costs

Inflation of costs is a process in which the overall level of prices rises due to the fact that spending on production and sale of products increases. A similar problem can arise also due to the fact that the aggregate supply exceeds the level of demand.

Inflation affects virtually all types of costs of the firm. Let us consider the main causes of this process. In fact, all organizations use some services, in particular transport, general use relationships and many others. Often, such products are characterized by price dictates due to the dominance of monopolization. That is, the cost of the services used by the company is increased, and the manager is not able to choose more inexpensive options. Then the organization is forced either to raise prices for its goods, or to work at a loss.

In those countries in which trade unions exist, cost inflation can arise because of the need to raise salaries for employees. However, for Russia this is irrelevant. In our country, at the moment, trade unions have little influence on the relationship between the employer and the employee.

As you know, most companies use borrowed funds. Consequently, cost inflation can arise due to monopoly in the banking sector. Interest rates are rising, and organizations inevitably have to increase their expenses, and, consequently, the cost of production increases.

For Russia, the inflation of costs, which is due to an excessive tax burden , is very typical . Why is this happening? Often, business owners include paying taxes to their expenses. Therefore, it is necessary to increase the cost of production in order to cover all costs.

The reason for inflation are customs duties. At a time when they are becoming more expensive, the cost of the organization's products or services is also increasing. It should be noted that this problem became especially urgent when the law on tax duties between the CIS countries was introduced.

So, let's sum up. Inflation is often caused by non-monetary factors. This may be a rise in wages, which outstrips productivity growth, a mismatch of factors such as supply and demand aggregate. The offer in this case is higher than the demand for it. It is worth noting that cost inflation does not appear due to excess cash. Therefore, it does not immediately devalue the currency.

Let's give a simple example of such inflation. There was a serious problem with the road, which is the delivery of products to a certain area. Then a bypass is sought. Its length can significantly exceed the length of the first road, on which the goods were delivered initially. Consequently, in the area under consideration, the prices for the vast majority of product names soar due to a significant increase in transportation costs of organizations. In this case, businesses usually reduce profitability. In the worst case scenario, they completely suspend their work due to uncompetitive prices.

Inflation can be open and closed. For a developed market economy with free pricing, the first option is more typical. Open inflation implies an unregulated increase in the cost of production. Eliminating it is relatively easy. Closed inflation is characteristic of a centralized economy. It is expressed not through price increases, but through a shortage of products. With closed inflation, it is rather difficult to fight, in view of the fact that in this version there are no natural mechanisms through which stable equilibrium can be achieved.