The impact of investment on inflation

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The impact of funding sources

Ill-conceived investments give impetus to an increase in inflation. This is primarily due to financial sources of investment programs. In the second, payback period of investment projects.

The ways of financing investment projects can be real savings, methods of deficit financing from the budget or credit expansion. In all three cases, there is a positive effect on the change in the rate of inflation, but to a different extent.
The least significant impact is provided by financing from real savings, since the money supply is withdrawn from circulation before the start of the investment program. In the economy, this creates a temporary monetary deficit, the value of which directly depends on the scale of investment projects.

With the beginning of the implementation of the investment program, the accumulated money supply goes into circulation, which inevitably leads to the overproduction of goods in some sectors and their deficit in others. The intensification of industry imbalances stimulates price growth for scarce products.
The mechanism of influence of the methods of budget deficit financing and credit expansion is characterized in that the money supply intended for investments directly goes into the industry turnover. The time lag is completely absent.

The impact of return on investment on inflation

Long-term and excessive investments have a direct impact on inflation. If there is a significant time lag between the purchase of equipment, raw materials, energy, etc., and the production of commodity products, the money supply enters the industry turnover, increasing monetary demand. There is no product offer. Only with the implementation of the investment program, the market begins to become saturated with goods. The imbalance between the demand for money and the supply of goods directly depends on the payback period of investment projects.

Ways to mitigate the inflationary effects of investments

1. For the localization of inflationary processes, decentralization is necessary. Decisions on the implementation of investment programs should be made directly by local actors.
2. The focus of investment projects on reducing average and marginal costs.
3. Regulation of domestic prices.
4. Reduced tax burden.
5. Improving the regulatory framework in part related to the subjects of investment.

 

 

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