• Meaning of Inflation
In economics, inflation is a rise in the general level
of prices of goods and services in an economy over
a period of time. When the general price level rises,
each unit of currency buys fewer goods and services.
Consequently, inflation also reflects an erosion in
the purchasing power of money – a loss of real value
in the internal medium of exchange and unit of
account in the economy. A chief measure of price
inflation is the inflation rate, the annualized
percentage change in a general price index
(normally the Consumer Price Index) over time.
Effects of Inflation
• Inflation's effects on an economy are various and
can be simultaneously positive and negative.
Negative effects of inflation include a decrease in
the real value of money and other monetary items
over time, uncertainty over future inflation may
discourage investment and savings, and high
inflation may lead to shortages of goods if
consumers begin hoarding out of concern that prices
will increase in the future. Positive effects include
ensuring central banks can adjust nominal interest
rates (intended to mitigate recessions),and
encouraging investment in non-monetary capital
• High Inflation :Economists generally agree
that high rates of inflation and hyperinflation
are caused by an excessive growth of the
• Low or moderate inflation may be attributed
to fluctuations in real demand for goods and
services, or changes in available supplies such
as during scarcities, as well as to growth in the
• Long period of sustained inflation is caused
by money supply growing faster than the rate
of economic growth.
Types of Inflation
• There are four main 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. When the supply is less, the prices of
these goods and services would rise, leading to a situation
called as demand-pull inflation. This type of inflation affects
the market economy adversely during the wartime.
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. For instance, a rise in the wages of
laborers would raise the unit costs of production and this
would lead to rise in prices for the related end product. This
type of inflation may or may not occur in conjunction with
• 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. A point noteworthy is pricing power
inflation does not occur at the time of financial
crises and economic depression, or when there is a
downturn in the economy. This type of inflation is
also called as oligopolistic inflation because
oligopolies have the power of pricing their goods
• 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. Thus, the ever-
increasing price of fuel has become an important
issue related to the economy all over the world. Take
the example of aviation industry. When the price of
oil increases, the ticket fares would also go up. This
would lead to a widespread inflation throughout the
economy, even though it had originated in one basic
sector. If this situation occurs when there is a
recession in the economy, there would be layoffs
and it would adversely affect the work force and the
economy in turn.
• Other Types of Inflation
Fiscal Inflation: Fiscal Inflation occurs when there is
excess government spending. This occurs when there is a
deficit budget. For instance,. America is also facing fiscal
type of inflation under the presidentship of George W. Bush
due to excess spending in the defense sector.
Hyperinflation: Hyperinflation is also known as runaway
inflation or galloping inflation. This type of inflation occurs
during or soon after a war. This can usually lead to the
complete breakdown of a country’s monetary system.
However, this type of inflation is short-lived.
To sum up, any type of inflation could affect the economy
of a country badly.
Measures to Control Inflation
• Given that inflation shows the imbalance between supply and demand
of goods at current prices so that measures be taken to reduce demand
or increase supply of goods and services.
The supply side Measures
• Increased Production
The supply of goods and services can be increased by
increasing agricultural and industrial production.
Agricultural production can be increased by providing an
adequate supply of agricultural inputs at low prices, the
modernization of agriculture and scientific farm
management, adequate water supply for irrigation, industrial
production etc similarly can be increased by increased
foreign direct investment, industrial credit growth, fiscal
• Control of illegal Activities
There are some illegal activities that cause significant
inflation in a country. It is hoarding, smuggling,
profiteering, black markets, etc. In the case of smuggling of
large quantities of staples like sugar, butter, wheat, rice, etc
are exported abroad illegally in order to obtain higher
prices. Similarly, the shortage in most cases artificial staples
to create higher profits. All activities of this evil must be
controlled through advertising, as well as punishment.
• Peace and Security
Production and distribution of goods and services can be
effected due to the existence of disturbances and insecurity
in society. In such circumstances, investors hesitant to invest
for fear of potential loss. Similarly, the production of
industrial products is affected due to several unpleasant
events such as strikes ,therefore peace and security must be
ensured to maintain the supply of goods and avoid the
danger of famine.
• Main Energy Sources
The supply of agricultural and industrial products is
highly dependent on energy availability. If the
energy source is expensive, the cost of production of
goods and services will be expensive too. Increased
production costs raise prices and cause inflation.
Therefore all necessary measures be taken to
provide major sources of energy in industrial and
agricultural sectors of the economy
The demand side
• Control of Money Supply
The money supply has a great influence on the rising
inflation that is, inflation with increasing the money
supply and vice versa. Therefore, to control
inflation, measures must be taken to control the
money supply. The money supply can be controlled
with the help of monetary policy in which the
central bank uses various methods, such as bank rate
policy, open market operations, changes in reserve
requirements, credit rationing , direct action etc. All
these methods are useful to control the rate of
inflation in a country.
• Population Control
In most developing countries, the population is increasing
very quickly that the production of goods and services does
not increase at the same pace. Because the imbalance
between supply and demand of goods and services are
produced and cause inflation. Therefore, to control inflation,
appropriate measures should be taken to control the
• Fiscal Policy
Fiscal policy refers to government policy of public spending
and taxes. The main fiscal policy objective is to maintain
only the slight change in the general price level. During
inflation, the government tries to reduce its expenditure on
unproductive activities and the direct tax rate increases so
that the purchasing power of the population is reduced. Due
to the reduction in the purchase of the population, demand
for goods and services will be reduced and controlled
There should be no Deficit Financing
Deficit financing shows that public spending beyond their
income. The purpose of deficit financing is to meet the
additional costs that the budget deficit. Because the money
supply increases in the country and causes inflation.
Therefore the deficit financing should be discouraged and
all development costs must be met through taxes and debt.
• There are several other options available to the
government to control inflation and wage and price
freeze, the rationing of goods, establishment of
public service shops, the price review committees,
boards of price stabilization, etc. This direct
measures are often used by the government to
It refers to continuous fall in price level. This happens
in recession period. If it last for longer period, it
harms the growth & development of the economy.
The Government should adopt policies which are
similar to the situation of recession. Eg.
• Increase income by reducing taxes
• Generate employment
• Adopt policies which enhance production