Definition of Inflation
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.
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Definition of Inflation by Different Economists
There is no generally accepted definition of inflation and different economists define it differently.
- According to Crowther, “Inflation is a ‘state’ is which the value of money is falling i.e. the prices are rising.”
- According to Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.”
- According to John Maynard Keynes, “Inflation is the result of the excess of aggregate demand over the available aggregate supply and true inflation starts only after full employment.”
- According to Paul Samuelson, “Inflation occurs when the general level of prices and costs is rising.”
- According to Silverman, “Inflation is the name given to the expansion of the money supplies whether in currency or credit in the excess of the amount justified by the government for the trade.”
- According to Arthur Cecil Pigou, “Inflation exists when income is expanding more than in proportion to the income earning activities.”
- According to Hanson, “Inflation is present when the volume of purchasing power is persistently running ahead of the output of goods and services so that there is a continuous tendency for prices both for commodities and factors of production to rise because the supply of goods and services and FPO’s fail to keep pace with demand for them.”
- According to Ackely, “A persistent and appreciable rise in the general level or average of prices.”
- According to Meyer, “An increase in the prices that occurs after full employment has been attained.”
- According to Coulbourn, “In inflation, too much money chases too few goods.”
Types of inflation
1. Types of Inflation on Coverage
Types of inflation on the basis of coverage and scope point of view:
- Comprehensive Inflation : When the prices of all commodities rise throughout the economy it is known as Comprehensive Inflation. Another name for comprehensive inflation is Economy Wide Inflation.
- Sporadic Inflation : When prices of only few commodities in few regions (areas) rise, it is known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon (winds bringing seasonal rains in India).
2. Types of Inflation on Time of Occurrence
Types of inflation on the basis of time (period) of occurrence:
- War-Time Inflation : Inflation that takes place during the period of a war-like situation is known as War-Time inflation. During a war, scare productive resources are all diverted and prioritized to produce military goods and equipments. This overall result in very limited supply or extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of basic goods slow down and can no longer meet the soaring demand from people. Consequently, prices of essential goods keep on rising in the market resulting in War-Time Inflation.
- Post-War Inflation : Inflation that takes place soon after a war is known as Post-War Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war.
- Peace-Time Inflation : When prices rise during a normal period of peace, it is known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of a long gestation (development) period.
3. Types of Inflation on Government Reaction
Types of inflation on basis of Government’s reaction or its degree of control:
- Open Inflation : When government does not attempt to restrict inflation, it is known as Open Inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs.
- Suppressed Inflation : When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.
4. Types of Inflation on Rising Prices
Types of inflation on the basis of rising prices or rate of inflation:
- Creeping Inflation : When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as aMild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (upto) 3% per annum (year), it is called Creeping Inflation.
- Chronic Inflation : If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation.
- Walking Inflation : When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation.
- Moderate Inflation : Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem.
- Running Inflation : A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.
- Galloping Inflation : According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred asJumping inflation. India has been witnessing galloping inflation since the second five year plan period.
- Hyperinflation : Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe’s regime.
5. Types of Inflation on Causes
Types of inflation on the basis of different causes:-
- Deficit Inflation : Deficit inflation takes place due to deficit financing.
- Credit Inflation : Credit inflation takes place due to excessive bank credit or money supply in the economy.
- Scarcity Inflation : Scarcity inflation occurs due to hoarding. Hoarding is an excess accumulation of basic commodities by unscrupulous traders and black marketers. It is practised to create an artificial shortage of essential goods like food grains, kerosene, etc. with an intension to sell them only at higher prices to make huge profits during scarcity inflation. Though hoarding is an unfair trade practice and a punishable criminal offence still some crooked merchants often get themselves engaged in it.
- Profit Inflation : When entrepreneurs are interested in boosting their profit margins, prices rise.
- Pricing Power Inflation : It is often referred as Administered Price inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. It does not occur during a financial crisis and economic depression, and is not seen when there is a downturn in the economy. As Oligopolies have the ability to set prices of their goods and services it is also called as Oligopolistic Inflation.
- Tax Inflation : Due to rise in indirect taxes, sellers charge high price to the consumers.
- Wage Inflation : If the rise in wages in not accompanied by a rise in output, prices rise.
- Build-In Inflation : Vicious cycle of Build-in inflation is induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation. Employers and Organisations raise the prices of their respective goods and services in anticipation of the workers or employees’ demands. This overall builds a vicious cycle of rising wages followed by an increase in general prices of commodities. This cycle, if continues, keeps on accumulating inflation at each round turn and thereby results into what is called as Build-in inflation.
- Development Inflation : During the process of development of economy, incomes increases, causing an increase in demand and rise in prices.
- Fiscal Inflation : It occurs due to excess government expenditure or spending when there is a budget deficit.
- Population Inflation : Prices rise due to a rapid increase in population.
- Foreign Trade Induced Inflation : It is divided into two categories, viz., (a) Export-Boom Inflation, and (b) Import Price-Hike Inflation.
- Export-Boom Inflation : Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). This is known as Export-Boom Inflation.
- Import Price-Hike Inflation : If a country imports goods from a foreign country, and the prices of imported goods increases due to inflation abroad, then the prices of domestic products using imported goods also rises. This is known as Import Price-Hike Inflation. For e.g. India imports oil from Iran at $100 per barrel. Oil prices in the international market suddenly increases to $150 per barrel. Now India to continue its oil imports from Iran has to pay $50 more per barrel to get the same amount of crude oil. When the imported expensive oil reaches India, the indian consumers also have to pay more and bear the economic burden. Manufacturing and transportation costs also increase due to hike in oil prices. This, consequently, results in a rise in the prices of domestic goods being manufactured and transported. It is the end-consumer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international market fall down then the import price-hike inflation also slows down, and vice-versa.
- Sectoral Inflation : It occurs when there is a rise in the prices of goods and services produced by certain sector of the industries. For instance, if prices of crude oil increases then it will also affect all other sectors (like aviation, road transportation, etc.) which are directly related to the oil industry. For e.g. If oil prices are hiked, air ticket fares and road transportation cost will increase.
- 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 Investment, Increase in money supply and Increase in Public Expenditure.
- 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.
6. Types of Inflation on Expectation
Types of inflation on the basis of expectation or predictability:-
- Anticipated Inflation : If the rate of inflation corresponds to what the majority of people are expecting or predicting, then is called Anticipated Inflation. It is also referred as Expected Inflation.
- Unanticipated Inflation : If the rate of inflation corresponds to what the majority of people are not expecting or predicting, then is called Unanticipated Inflation. It is also referred as Unexpected Inflation.
- Demand-Pull and Cost-Push Inflation
- Effects of Inflation on Different Groups of Society
- Impact of Inflation on Working Capital Requirement
- Economic Policies to Control Inflation