INFLATION

 A situation of rising prices of goods. The rate of inflation is defined as the rate of change of the price level.

Inflation and other forms

Deflation- Decrease in level of prices.

Reflation- Moderate degree of controlled inflation

Disinflation- decline in the rate of inflation

Stagflation- Inflation Accompanied by stagnation on the development

Causes of inflation

A. Factors causing an increase in demand

Increase in the money supply

Increase in disposable income

Increase in community aggregate spending on consumption

Increase in exports

Increase in salaries, wages

Increase In population

B. Factor causing a decrease in supply

Deficiency of capital requirement

Scarcity of other complementary factors of production

Decrease in imports

Hoarding by traders

Natural Calamities

Types of Inflation:

1. Suppressed Inflation: Deliberate policies are adopted to prevent price rise, but the impact of these policies is only temporary since prices rise as soon as these are relaxed. Here is a situation in which the Government does not tackle the factors causing inflation; it only imposes controls to check the price rise.

2. Creeping Inflation. A sustained rise of less than 3 percent in prices per annum is called creeping inflation. It is not considered serious for the economy.

3. Walking Inflation: When the rise in prices falls in the range of 3 percent to 6 percent, it is called walking inflation.

4. Running Inflation: When the sustained rise in prices is about 7-10% per annum, it is called walking inflation. This type of inflation is a cause of concern for the Government and warrants remedial measures.

5. Galloping or Hyperinflation: This is the most dangerous type of inflation and prices rise by more than 10% per annum. This type of inflation should not be allowed to persist.

6. Open Inflation: Inflation is said to be open when the market forces are allowed to operate freely, for the prices of goods and services set without abnormal interruption by the authorities. The Government does not take any steps to check the rise in the prices.

7. Suppressed or Repressed Inflation: Suppressed inflation refers to a situation when the Government actively intervenes to check the rise in the price level through the use of price control measures and rationing of scarce items in the economy.

8. Comprehensive Inflation: This type of inflation occurs when prices of all the commodities register a rise in the economy.

9. Sporadic Inflation: It is sectoral inflation. Under this ty0pe of inflation only the prices of a few commodities who an upward trend.

10. Demand-Pull Inflation or excess Demand Inflation: It is often described as “too much money chasing too few goods” It occurs as a result of excessive demand for goods and services which pull prices upward.

11. Demand–shift Inflation: It is a special case of demand-pull inflation. This occurs when shifts take place in demand for different goods and services with total demand remaining unchanged. This arises as a result of households reducing the demand for good A, while increasing demand for B, by an equal rupee amount.

12. Cost-push Inflation: Enforcement of wage increase by unions and increase of profits by employers lead to cost-push inflation. Here the money wages rise more rapidly than the productivity of labor, as a result of which the cost of production of commodities rises, employers, in turn, increase the prices of the commodities. Higher wages enable workers to buy as much as before, even in the light of higher prices. On the other hand, unions demand higher wages in view of higher prices. In this way, the wage cost spiral continues leading to cost-push inflation to prevail.

13. Mixed Demand-pull and Cost–push Inflation: This situation is termed a hybrid form of inflation. It is a situation in which some elements of demand-pull inflation and cost-push inflation are found. In reality, excess demand and cost-push forces operate simultaneously and interdependently in an inflationary process.

In years of poor harvest, the prices of agricultural commodities rise as the demand is more than supply. The rise in the price of farm commodities causes the cost of living index to increase as farm commodities carry substantial weights. In view of rising in the cost of living index, wages rise in industries causing cost-push inflation.