Generally, inflation is a substantial and rapid rise in the general price level which causes a decline in the purchasing power of money. When the general price level rises, each unit of currency buys fewer goods and services than before. Inflation is statistically measured in terms of percentage increased in the price index per-unit of time. But each and every rise in general price level cannot be termed as inflation in the true sense. To be inflation, the following conditions should be fulfilled:
1. The price level is raising not the price of a single commodity.
2. The price rise must be continuous.
3. The price rise must be significant (large enough).
Types/ Kinds of Inflation
There are different types of inflation which can be classified as follows:
1. On the Basis of Speed
On the basis of speed, inflation is classified as follows:
a. Creeping inflation:
When the annual rate of inflation is up to 3 percent, it is called creeping inflation. It has no negative impact on the economy. It creates positive effect on investment, production and employment.
b. Walking inflation:
When the rate of rise in price level is in the range of 3 to 7 percent per-annum or less than 10 percent, it is called walking inflation. It is a warning signal for the government to control it before turns into running inflation.
c. Running inflation:
When the price level rises at a rate of speed of 10 to 20 percent per annum, it is called running inflation. It affects the poor and middle classes people adversely. If it is not controlled, it turns into hyper inflation.
d. Hyper inflation:
When price level rises more than 20 percent per annum. It is called hyper inflation. This is the last stage of inflation which starts after the full-employment level is reached. Keynes consider this type of inflation as the true inflation.
2. On the Basis of Inducement
On the basis of inducement, inflation is classified as follows:
a. Wage induced inflation:
When inflation occurs due to a rise in wages, it is called wage-induced inflation. With the increase in wages, price level also rises.
b. Profit induced inflation:
When the producers tend to mark-up their profit due to their monopoly position, it will lead to profit induced inflation. It increase the cost of production, which in turn, pushes up the prices.
c. Scarcity induced inflation:
When the supply of goods and services does not increase due to natural calamities, the price level tends to rise. Such rises in price level is called scarcity-induced inflation.
d. Deficit induced inflation:
When a government covers the deficit in its budget by creating new money, the purchasing power of people increases without increase in production. This leads to a rise in the price level which is known deficit induced inflation.
e. Currency induced inflation:
When the money supply exceeds the available output, it leads to rise in price level. This is called currency induced inflation.
f. Credit induced inflation:
When price level rises due to an expansion of credit without increase in money supply, it is known as the credit induced inflation.
g. Foreign trade induced inflation:
When exports of a goods and services increase, there will be the shortage of goods and services in home country. It leads to rise in price in home country. Such rise in price level is known as foreign trade induced inflation.
3. On the Basis of Time
On the basis of time, inflation is classified as follows:
a. Peace time inflation:
Peace time inflation refers to the rise in price level during normal time period. This type of inflation is experienced in the less developed economies due to excessive aggregate expenditure on development projects which have longer gestation periods. This leads to rise in price level.
b. War time inflation:
In the war time, unproductive government expenditure increases which in turn, price level rises. It is known as war time inflation. In war time, output does not increase with the increase in government expenditure. But demand for goods increases as a result price level rises.
c. Post war inflation:
The inflation occurred after the war is called post war inflation. The heavy taxes imposed on the people in time of war are withdrawn in the post war period. As a result, the disposable income of the people increases without increase in output. Hence, price level rises.
4. On the Basis of Scope
On the basis of scope, inflation can be classified as follows:
a. Comprehensive inflation:
When the prices of all goods and services increase throughout the economy, it is known as comprehensive inflation.
b. Sporadic inflation:
When the price rises only in some sectors of the economy, it is called sporadic inflation. It is also known as sectoral inflation because it affects a few sectors of the economy but not whole economy. In this case, the price of some goods and services increases due to certain physical bottle neck which adversely affect of these goods.
5. On the Basis of Government Reaction
On the basis of government reaction, inflation is classified as follows:
a. Open inflation:
If the government does not make any effort to control the price rise and the market mechanism is allowed to functions without any intervention, it is known as open inflation. Under open inflation, scarce resources are allocated among the competing industries. If there is shortage of any particular resources, the price of such resources rises.
b. Suppressed inflation:
If the government checks the price rise through price control and rationing, it is called suppressed inflation. Once these measures are withdrawn, the demand for goods increases and the suppressed inflation becomes open inflation.
6. On the Basis of Employment Level
On the basis of employment level, inflation is classified as follows:
a. Partial inflation:
When theprice levelrises with the increase in money supply before full employment stage, it is called partial inflation. Before full-employment, output and employment increase with the increase in money supply. There is slight rise in the price level under partial inflation.
b. Full inflation:
After full-employment level, as price level rises with the increase in money supply, it is called full inflation. In this case, output and employment will not increase with the increase in money supply, only price level rises.
7. Other Types
On the basis of types, inflation is classified as follows:
a. Ratchet inflation:
Under ratchet inflation, the prices in certain sectors are not allowed to fall even if there is every reason for the price to fall. In certain sectors, the aggregate demand is excessive and in others, it is quite low. In the excess demand sectors, the prices will rise and in the deficient demandsectors, the prices should decline. But the prices are not allowed to fall in the deficient-demand sectors. As a result, the general price level rises. Such rise in price level is known as ratchet inflation.
b. Stagflation:
The simultaneous existence of high rates of inflation and unemployment is called stagflation. For example, after World War II, in those countries which pursued stabilization policies with an objective to achieve full-employment, unemployment remained relatively high while inflation rate increased.
8. On the basis of Cause
Inflation is caused by two factors due to the increase in effective demand and due to increase in cost of production.
The inflation caused by the increase in demand is known as demand pull inflation.
On the other hand, the inflation caused by the increase in cost of production is known as the cost push inflation.
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