Types Of Inflation Assignment Help | Types Of Inflation Homework Help


Inflation is persistent and substantial rise in the general level of prices after full employment. A mere rise of 0.2 or 0.3 percent in a year in the price level of an economy can hardly deserve to be described as inflation, since, it is not substantial. A rise in the price for few commodities, while a fall in the price for others would hardly deserve to be called as inflation .After understanding the precise meaning of inflation, it is important to learn the different types of inflation on various bases.

1. On the Basis of Rate of Inflation

On the basis of intensity of price rise, inflation can be distinguished into three types, that is,
(a) creeping inflation
(b) running inflation
(c) hyper inflation

(a)  Creeping Inflation

 In the initial stage of the inflation, prices rise at a very low rate. This mild rate inflation may be referred to as creeping inflation… Although it is difficult to quantify it, some economists have characterized an inflation rate up to 3 percent per annum as creeping inflation1. According to many economists, a mild increase in the price level is a necessary condition for economic growth. A slow rate of rising prices may provide the inducement for investment. This will save the economy from falling into stagnation trap.

(b) Running Inflation

If mild creeping inflation is allowed to go unchecked for long, the rise in price level becomes more marked and alarming in course of time. It may Assume the character of running inflation. In such a situation, prices rise at a faster rate of , say, around 8 to 10 percent per annum. Running inflation is a warning signal. Suitable necessary measures are required at this stage to arrest inflationary tendencies. If these steps are not taken in time, the running inflation may uproot the economy through reduction in the saving capacity and hence long term investment programmmes.

(c) Hyper Inflation

When the monetary authorities lose control over the running inflation, it may result into hyper inflation. This is the final stage of inflation, where there is no limit to which the price level may rise. In this stage, prices rise at an extremely rapid rate. This type of inflation is also referred to as galloping or jumping inflation.

2. On the Basis of Degree of Control

inflation can be classified into open and suppressed inflation.

(a) Open inflation

Inflation is said to open, when prices continue to rise without any interruption and control. Thus, open inflation is the result of the uninterrupted operation of the market forces. There are no checks or controls on the distribution of commodities by the government. Increase is demand and shortage of supplies persist leading to open inflation. In the words of Milton Friedman, it is “an inflationary process in which prices are permitted to rise without being suppressed by Government price control or similar techniques.” It may ultimately end in hype inflation. According to A.C.L Dey, open inflation is initiated by some change, which makes it impossible to satisfy the whole of the demand that may be forthcoming at existing prices resulting in initial price rise. Further, rise in the prices is induced by the reactions of the transactors.

(b) Suppressed Inflation

Under this type of infation, price level is not allowed to rise through the use of government policies like price controls  and rationing, through conditions exist for rise in the price level. The prices may rise as soon as control measures are lifted except in some rare cases, where no inflationary pressure is being built up for the future. Suppressed (or repressed) inflation has two implications, i.e. postponement of consumer expenditure and diversion of demand.
Suppressed inflation has many dangers. First, it creates administrative problems, particularly when administration is inefficient and corrupt resulting in black marketing. Secondly, it leads to uneconomic diversion of country’s productive resources from fixed priced essential goods producing industries to non-essential goods producing industries, whose prices are not controlled.
Thirdly, controls increase the attractiveness of leisure. Some one cannot buy freely all the things one would like to buy with his current income, causing decrease in output and inflation.

3. On the Basis of Causes

Inflation   is of five types on the basis of causes.

(a) Credit Inflation

Banks create credit on the basis of primary deposits of the customers or derivative deposits generated from the loans and advances extended by the banks. Expansion of credit money leading to an increase in the money supply unaccompanied by rise in production originates
credit inflation.

(b) Currency Inflation

Inflation caused by excessive flow of currency money is called currency inflation. It occurs when the government issues more currency without a corresponding legitimate demand to buy goods and services.

(c) Deficit Induced Inflation

When the expenditure of the government exceeds its revenue, the gap is filled through deficit financing. It will cause increase in the money supply, whatever technique may be adopted for this purpose. This type of inflation resulting in increase in the prices is also called budgetary inflation.

(d) Demand Pull Inflation

The most common and an important cause for inflation is the pressure of ever rising demand on a stagnant or less rapidly supply of goods and services. Here , aggregate demand has been ‘pulled’ above (or in excess of ) what the economy is capable of producing (or even supplying) in the short sum. An increase in aggregate demand, supply remaining constant, will pull up the prices. Demand pull inflation occurs when there exists an excess demand over the available supplies at the existing prices. This is illustrated in Figure 11.1. In this figure, X-axis denotes income or output, while the Y-axis measures the price level. The aggregate supply curve rises upward to the right till it becomes vertical corresponding to full employment level of output OF. As the aggregate demand curves shift upward from D1 to D2, D3, D4 and D5, due to increase in the demand, the price level rises from OP1 to OP2, OP3, OP4 and OP5, respectively. It is observed that initially both price as well as output rise.

UserFiles/Demand Pull Inflation
______________Fig. 11.1: Demand Full Inflation

Once full employment level has been attained at point ‘C’ on the aggregate supply curve, further increase in the aggregate demand to D4 and D5  will only raise the price level. This is known as demand pull inflation.. Various factors are responsible for the inflationary pressure on the demand side.
The major source of inflation is increase in the quantity of money. Increase in the quantity of money results from an increase in demand deposits and expansion of credit by the banks, raising the level of income. An increase in the (disposable) income causes an increase in consumption expenditure. Such an increase in expenditure raises the price of good. The existence of black money due to corruption, tax evasion , etc., is responsible for the creation of unearned income, which when spent extravagantly leads to price rise. Money supply can also rise, when the government resorts to deficit financing to finance its economic development plans through borrowing from the central bank and the commercial banks. This will ultimately exert pressure on the level of prices.
Yet another factor responsible for increased demand is foreign expenditure on domestic goods and services. This factor is important for a country that maintains an export surplus.However, if the income generated is used on imports (or is hoarded), it will not have inflationary effect on the economy.

(e) Cost Push Inflation

Cost push inflation results from a situation when the costs of production of industry rise either due to increases in the prices of raw materials, intermediate goods or an increases an wages, This will cause an increases in the prices of consumer goods. When the cost of production rises, aggregate supply curve shifts to the left, indicating that a lesser quantity is supplied at the prevailing prices. Downward shifts in the supply curves from S1 to S2, S3 and S4 are shown in Figure 11.2. Assuming the aggregate demand curve remaining constant, a decrease in the supply pushes the price level upwards from OP1 to OP2, OP3 and OP4  respectively.

UserFiles/Cost Push Inflation 

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