Inflation

Inflation

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.

Types of Inflation

• Based on Cause

  • Demand Pull Inflation
    • Demand pull inflation arises when aggregate demand in the economy becomes more than aggregate supply.
    • Reasons – Rise in population, black money, rise in income.
  • Cost push inflation
    • when there is decrease in aggregate supply of goods and services results in an increase in cost of production.
    • Reasons – Infrastructure bottlenecks cause production and distribution cost to rise, rise in minimum support price , rise in international price, hoarding and black marketing, rise in indirect taxes.
  • Built-In Inflation
    • Firms pass the higher labour costs on to their customers as higher prices. It becomes a vicious cycle of higher price-higher labour cost-higher price.
  • Monetary Inflation
    • RBI printing more and more money (deficit financing) can cause inflation. Monetary inflation is a sustained increase in the money supply of a country (or currency area).
  • Structural Inflation
    • Due to the weak structure of the institutions and markets in the economies, mostly the developing and low-income ones. Example- Artificial shortage of foods/ goods due to hoarding and Poor agriculture produce due to poor monsoons, inadequate irrigation facilities etc.
  • Profit-Induced Inflation
    • If the producers, due to their monopoly position, tend to mark-up their profit margin, it will lead to profit-induced inflation.

• Based on Speed

  • Creeping (1-4%) – When the rate of price increases slowly rises over time. For example, the price increases from 2% to 3%, to 4% a year.
  • Walking (2-10%) – When it is in single digits – less than 10%.Central Banks will be increasingly concerned.
  • Running (10-20%) – When it starts to rise at a significant rate. It is usually defined as a rate between 10% and 20% a year.
  • Galloping (20%-1000%) – This is an inflation rate of between 20% up to 1000%. At this rapid rate of price increases, it is a serious problem and will be challenging to bring under control.
  • Hyper-inflation – Inflation rising at a very fast rate, can lead to a total collapse of the currency and economic crisis.

• Other Types

  • Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
  • Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation accompanied by an economic recession.
  • Core Inflation: Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of price increases excludes these items because their prices are much more volatile. It is most often calculated using the consumer price index (CPI), which is a measure of prices for goods and services.
  • Headline Inflation: A measure of the total price increases within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.