Inflation is commonly understood as a situation of substantial and rapid general increase in the price level and consequent fall the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy. The behavior of general prices is measured through price indices. The trend of price indices reveals the course of inflation or deflation in the economy. Crowther defines inflation as “a state in which the value of money is falling, ie., prices are rising”. Professor Samuelson defines “Inflation occurs when the general level of prices and costs is rising”.
Types of Inflation.
On different grounds, economists have classified inflation into various types. According to the rate inflation there are four types of inflation.
- Moderate Inflation
- Running Inflation
- Galloping Inflation
- Hyper Inflation
Moderate inflation is a mild and tolerable form of inflation. It occurs when prices are rising slowly. When the rate of inflation is less than 10 per cent annually, or it is a single digit annual inflation rate, it is considered to be moderate inflation in the present day economy. It does not disrupt the economic balance. It is regarded as stable inflation in which the relative prices do not get far out of line.
When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. When prices are rising at double or triple digit rates of 20,100 or 200 per cent a year, the situation may be described as galloping inflation. Galloping inflation is really a serious problem. It causes economic distortions and disturbances.
In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per year. There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 per cent times. Hyper inflation is a monetary disease.
Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull Inflation and Cost Push Inflation.
Demand Pull Inflation: According to the demand-pull theory, prices rise in response to an excess of aggregate demand over existing supply of goods and services. It is also called excess-demand inflation. In the excess-demand theories of inflation, excess demand means aggregate real demand for output in excess of maximum feasible, or potential, or full employment, output (at the going price level). The demand-pull theorists point out that inflation (demand-pull) might be caused, in the first place, by an increase in the quantity of money. Demand-pull or just demand inflation may be defined as a situation where the total monetary demand persistently exceeds total supply of real goods and services at current prices, so that prices are pulled upwards by the continuous upward shift of the aggregate demand function. Causes of Demand-pull inflation are
- Increase in Public Expenditure.
- Increase in Investment.
- Increase in money supply.
Cost Push Inflation: Cost push inflation or cost inflation is induced by the wage-inflation process. This is especially true for a Country like India, where labour intensive techniques are commonly used. Theories of cost-push inflation (also called sellers’ or mark-up inflation) came to be put forward after the mid-1950s.They appeared largely in refutation of the demand-pull theories of inflation and three important common ingredients of such theories are 1) that the upward push in costs is autonomous of the demand conditions in the concerned market 2) that the push forces operate through some important cost component such as wages, profits (mark up), or materials cost. Accordingly, cost-push inflation can have the forms of wage-push inflation, profit-push inflation, material-cost push inflation, or inflation of a mixed variety in which several push factors reinforce each other and that the increase in costs is passed on to buyers of goods in the form of higher prices, and not absorbed by producers. Thus, a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level, because fundamentally, prices are based on costs.It has been said that a rise in wages causing arise in prices may , in turn , generate an inflationary spiral because an increase would motivate the workers to demand more wages.