DEFINITION According toParkin and Bade Inflation is an upward movement in the average level of prices. Its opposite is deflation , a downward movement in the average level of prices. The boundary between inflation and deflation is price stability.
TYPES OF INFLATION Wage Inflation: Wage inflation is also called as demand-pull or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services , there is likely to be a forceful increase in the prices of finished goods and services.
Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins.
Sectoral Inflation: This is the fourth major type of inflation. The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry.
CAUSES OF INFLATION Inflation is caused due to several economic factors: When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation. Increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation.
When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation.
High taxes on consumer products, can also lead to inflation.
Demands pull inflation, wherein the economy demands more goods and services than what is produced.
Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices
There are two broad ways in which governments try to control inflation. These are- 1. Fiscal measures. 2. Monetary measures
Measures to control inflation Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. Monetary Policy Monetary policy can control the growth of demand through an increase in interest rates and a contraction in the real money supply. For example, in the late 1980s, interest rates went up to 15% because of the excessive growth in the economy and contributed to the recession of the early 1990s. Fiscal Policy • Higher direct taxes (causing a fall in disposable income)• Lower Government spending • A reduction in the amount the government sector borrows each year (PSNCR) Direct wage controls - incomes policies Incomes policies (or direct wage controls) set limits on the rate of growth of wages and have the potential to reduce cost inflation.