What is imported inflation

imported inflation

Transfer of price level increases from abroad (inflation) to Germany.
1. Direct transfer: Price increases for imported goods (e.g. mineral oil) lead directly to higher domestic prices of these goods or of products in which the imported goods are processed. A switch to unaffected purely domestic goods can then lead to rising prices for these too.
2. Indirect transmission: Rising prices on important export markets cause (domestic) producers to adjust the prices demanded in Germany to the prices to be achieved abroad.
3. Money supply (or demand amount) price mechanism: In comparison to other countries, domestic prices, which rise relatively slightly, have an export-promoting effect, so that increasing foreign demand increases prices via an export-related increase in income and / or money supply.

Domestic currency depreciation caused by external influences, especially in the system of (relatively) stable exchange rates. If the exchange rate is not set in accordance with the real economic conditions, the very high exports of a country cause a strong inflation of the domestic money supply in this country (through the exchange of the incoming foreign currency into its own currency by the central bank, which creates money as a result).

Transfer of inflation prevailing abroad (world inflation) to the domestic market. When world inflation accelerated in the early 1970s and the Bretton Woods system of fixed exchange rates plunged from one crisis to another, the inflation theory, which until then had mostly been fixed on the analytical framework of closed economies, increasingly turned to the question of the international transmission mechanisms of inflation the view especially of small open economies in alternative exchange rate systems. Above all, the externally induced demand pull and supply pressure with fixed exchange rates were discussed. If exchange rates are fixed and inflation abroad is stronger than in Germany, a balance of payments surplus arises over time: The current account is activated because exports abroad are becoming more and more competitive in terms of prices and domestic imports are becoming too expensive. The non-monetary (Keynesian) inflation theory explains the resulting inflation import with the non-monetary demand pull (income effect), which is connected with the activation of the current account or with the increasing external contribution. From the point of view of monetary (neoclassical) inflation theory, on the other hand, inflation is transferred through the monetary demand pull (liquidity effect), which results when the balance of payments is activated from the foreign exchange purchases by the domestic central bank necessary for exchange rate stabilization (monetary price mechanism, monetary balance of payments theory) . In reality, both transmission mechanisms should be effective simultaneously. A third possibility of importing inflation at fixed exchange rates is the supply-side import price pressure (cost pressure). It arises when foreign countries inflate more strongly than domestic ones or when world market prices rise for individual inputs that can hardly be substituted in the short and medium term. The increases in import prices have a direct cost-increasing effect on domestic customers and drive up their end product prices. If the suppliers of import substitutes exhaust their room for price increases, the import price pressure will also spread to domestic products. On the other hand, an increase in world market prices also gives exporters the opportunity to raise their asking prices on the domestic market and to generate domestic export price pressure. The cost pressure imported through this international price context will persist as long as the world market prices of tradeable goods rise and the exchange rate remains unchanged. Imported inflation can largely be warded off by revaluing the domestic currency more frequently or by releasing exchange rates. Even if, in theory, the possibility of importing inflation with free exchange rates via non-monetary demand and the direct international price relationship cannot be ruled out, flexible exchange rates are practically still the most effective protection against international inflation contagion. Literature: Claassen, E.-M. (Ed.), Compendium of currency theory, Munich 1977. Fels, G., The international price context, Cologne 1969. Westphal, ü., The imported inflation at fixed and flexible exchange rates, Tübingen 1968. Bender, D., Monetary transmission and Control problems in open economies, in: Thieme, HJ (Ed.), Geldtheorie, Baden-Baden 1985, p. 107 ff.

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