Types of Inflation

Types of Inflation

On the Basis of Causes:
Currency infl ation:
–  This type of inflation is caused by the printing of currency notes.

Credit inflation:
–  Being profi t-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.
Deficit-induced inflation:
–  The budget of the government refl ects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget defi cit, any price rise may be called the deficit-
induced infl ation.

Demand- Pull inflation:
–  An increase in aggregate demand over the available output leads to a rise in the price level. Such
infl ation is called demand-pull in fl ation (henceforth DPI). But why does aggregate demand rise?
Classical economists attribute this rise in aggre gate demand to money supply. If the supply of money in an economy ex ceeds the available goods and services, DPI appears. It has been described by Coulborn as a situation of “too much money chasing too few goods.”
Cost-push infl ation:
–  Infl ation in an economy may arise from the overall increase in the cost of production. This type
of infl ation is known as cost-push infl ation (henceforth CPI). Cost of pro duction may rise due to
an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not completely market-determined. Higher wage means high cost of production. Prices of commodities are thereby increased.

On the Basis of Speed or Intensity:
Creeping or Mild Infl ation:
–  If the speed of upward thrust in prices is slow but small then we have creeping infl ation. What
speed of annual price rise is a creeping one has not been stated by the economists. To some, a
creeping or mild infl ation is one when annual price rise varies between 2 p.c. and 3 p.c. If a rate
of price rise is kept at this level, it is con sidered to be helpful for economic development. Others
argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of no danger.
Walking Inflation:
–  If the rate of annual price increase lies between 3% and 4%, then we have a situation of walking
infl ation. When mild infl ation is allowed to fan out, walking infl ation appears. These two types
of infl ation may be described as ‘moderate infl ation’.
–  Often, one-digit infl ation rate is called ‘moder ate infl ation’ which is not only predict able, but
also keeps people’s faith on the monetary system of the country. Peoples’ confi dence gets lost once moderately maintained rate of infl ation goes out of control and the economy is then caught with the galloping infl ation.
Galloping and Hyperinfl ation:
–  Walking infl ation may be converted into running infl ation. Running infl ation is danger ous. If it
is not controlled, it may ulti mately be converted to galloping or hyperinfl ation. It is an extreme form of infl ation when an economy gets shattered. “Infl ation in the double or triple digit range
of 20, 100 or 200% a year is labeled “galloping infl ation”.
Hyper Inflation:
–  Hyperinfl ation is when the prices of goods and services rise more than 50 percent a month. It is
fortunately very rare. In fact, most examples of hyperinfl ation have occurred when the government
printed money recklessly to pay for war. Examples of hyperinfl ation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War.
Stagflation
Stagflation is when the economy experiences stagnant economic growth, high unemployment,
and high infl ation. It is unusual because policies to reduce infl ation make life diffi cult for the
unemployed, while steps to alleviate unemployment raise inflation.
Core Inflation
–  This shows price rise in all goods and services except food and energy due to high prices fluctuations. Oil is a highly volatile commodity, with daily price variations. Food prices change
based on gas prices (it heavily refl ects on transportation costs), which are directly linked to oil prices. As the government needs a fairly stable and true picture of infl ation, core infl ation is calculated.
Headline Inflation
–  This measure considers total infl ation in an economy, including food and energy prices, which
are more volatile.

 

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