Inflation and types of inflation

1. INFLATION
TOPIC

2. Definition
• Inflation is an economic condition in which the aggregate prices
are always increasing in a country and the value of the money is
falling.
• Inflation means not only sustainable rise in the price of the goods
and services, but the value of the currency falls in the market and the
supply of money circulation is more.

3. Causes of Inflation
 The Money Supply
Inflation is primarily caused by an increase in the money
supply that outspaces economic growth. During the past century, the
value of money is determined by the amount of currency that is in
circulation and the public’s perception of the value of that money.

4.  The National Debt
As a country’s debt increases, the government has two
options: they can either raise taxes or print more money to pay off
the debt. A rise in taxes will cause businesses to react by raising their
prices .
Alternatively, the government printing more money will lead directly
to an increase in the money supply, which will in turn lead to the
devaluation of the currency and increased prices.

5.  Demand-Pull Effect
The demand-pull effect states that as wages increase within
an economic system people will have more money to spend on
consumer goods. This increase in liquidity and demand for consumer
goods results in an increase in demand for products. As a result of
the increased demand, companies will raise prices to the level the
consumer will bear in order to balance supply and demand.

6.  Cost-Push Effect
Another factor in driving up prices of consumer goods and
services is explained by an economic theory known as the cost-push
effect.
Essentially, this theory states that when companies are faced
with increased input costs like raw goods and materials or wages,
they will preserve their profitability by passing this increased cost of
production onto the consumer in the form of higher prices.

7.  Exchange Rates
Inflation can be made worse by our increasing exposure to
foreign marketplaces. In America, they function on a basis of the
value of the dollar. On a day-to-day basis, we as consumers may not
care what the exchange rates between our foreign trade partners are,
but in an increasingly global economy, exchange rates are one of the
most important factors in determining our rate of inflation.

8. Types of Inflation
 Creeping Inflation
This is also known as mild inflation or moderate inflation.
This type of inflation occurs when the price level rises over a period
of time at a mild rate. When the rate of inflation is less than 10 per
cent annually, or it is a single digit inflation rate, it is considered to
be a moderate inflation.
On The Basis Of Speed

9.  Running inflation
A rapid acceleration in the rate of rising prices is called
Running Inflation. It occurs when prices rise by more than 10%
in a year The rate of growth in prices are more i.e.; the inflation is
growing at the rate of 10%.
 Walking inflation
When the rate of rising prices is more than the Creeping Inflation, it
is known as Walking Inflation. The inflationary rate of a country is
around 5% little more than creeping.

10.  Galloping Inflation
Higher growth rate compared to the earlier stages
i.e.; the change is around 25%. Jumping Inflation is its
another name. India has been witnessing it from second
five-year plan period.

11. On The Basis Of Inducement
 Deficit induced
The deficit in the balance of payments of the country or fiscal
deficit is the reasons for inflation. The value of the currency
is falling due to the above mentioned reasons.
 Wage induced
Due to higher wages and salaries the money supply in the country
increases leading to inflation.

12.  Profit induced
Higher the profit the organizations earn, they tend to share
with their stakeholders which induces the money supply and reduces
the value of money.
 Scarcity induced
He raw materials and other input factor scarcity (for example)
may induce the price hike in the market.
 Currency induced
The value of currency fluctuates due to various internal and
external forces.

13.  Sectoral inflation:
A particular sector of a country may be the reason for
economic growth or money supply (for example in India the
growth in service sector particularly IT).
 Foreign trade induced
If the country has unfavorable balance of payments, that
means the country’s exports are less than the imports, then we need
more of foreign currency to make payments to the exporters
ultimately this increases the demand for other currencies in the
market.

14.  War time, post war, peace time
During war period the government expenditure on various
amenities will induce the inflation and the production, availability
of the commodities will be low which leads to price hike. To settle
down the economy after war or natural calamities the government
spending will be more.

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