ECONOMICS INFLATION CAUSES EFFECTS TYPES OF INFLATION

1. ECONOMICS
INFLATION
CAUSES
EFFECTS
TYPES OF INFLATION

2. INFLATION
H.G Johnson defines,
• “inflation as a sustained rise in prices.”
F.S.Brooman defines,
• “inflation as continuing increase in the general Price level.”
Edward Shapiro defines,
• “inflation as persistent and appreciable rise in The general level of prices.”
• From the above it reflects that a sustained rise in prices may be of various Magnitudes.
• Accordingly different names have been given to inflation Depending upon the rate of
rise in prices.

3. • Inflation is the rate at which the prices for goods and services increase.
• Inflation often affects the buying capacity of consumers.
• Most Central banks try to limit inflation in order to keep their respective
economies functioning efficiently. There are certain advantages as well as
disadvantages to inflation.
• Inflation refers to the increase in the prices of the goods and services of daily use,
such as food, housing, clothing, transport, recreation, consumer staples, etc.
• Inflation is measured by taking into consideration the average price change in a
basket of commodities and services over a period of time.
• Inflation is calculated in India by the Ministry of Statistics and Programme
Implementation.

4. CAUSES OF INFLATION
Inflation is caused by multiple factors, here are a few:
• Money Supply: Excess currency (money) supply in an economy is one of the primary cause of inflation.
This happens when the money supply/circulation in a nation grows above the economic growth,
therefore reducing the value of the currency. In the modern era, countries have shifted from the
traditional methods of valuing money with the amount of gold they possessed. Modern methods of
money valuation are determined by the amount of currency that is in circulation which is then followed
by the public’s perception of the value of that currency.
• National Debt: There are a number of factors that influence national debt, which include the nations
borrowing and spending. In a situation where a country’s debt increases, the respective country is left
with two options:
Taxes can be raised internally.
Additional money can be printed to pay off the debt.

5. • Demand-Pull Effect:The demand-pull effect states that in a growing economy as
wages increase within an economy, people will have more money to spend on
goods and services. The increase in demand for goods and services will result in
companies raising prices that the consumers will bear in order to balance supply
and demand.
• Cost-Push Effect:This theory states that when companies face increased input
cost on raw materials and wages for manufacturing consumer goods, they will
preserve their profitability by passing the increased production cost to the end
consumer in the form of increased prices.
• Exchange Rates:An economy with exposure to foreign markets mostly functions
on the basis of the dollar value. In a trading global economy, exchange rates play
an important factor in determining the rate of inflation.

6. EFFECTS OF INFLATION
• When there is inflation in the country, the purchasing power of the people
decreases as the prices of commodities and services are high. The value of
currency unit decreases which impacts the cost of living in the country. When the
rate of inflation is high, the cost of living also increases, which leads to a
deceleration in economic growth.
• However, a healthy inflation rate (2-3%) is considered positive because it directly
results in increasing wages and corporate profitability and maintains capital
flowing in a growing economy.

7. TYPES OF INFLATION

8. TYPES OF INFLATION
• Creeping Inflation: When a sustained rise in price of annual increase of less than
3 % Per annum is characterized as creeping inflation.
• Walking /Trotting Inflation: When the rate of rise in prices is in the intermediate
range of 3 to 6 Percent per annum or less than 10 per cent then it is called
walking Inflation. Inflation at this rate is a warning signal for the government to
control it Before it turns into running inflation.
• Running Inflation: When prices rise rapidly like the running of a horse at a rate or
speed of 10 or 20 per cent per annum, it is called running inflation. It affects the
poor and middle classes adversely.

9. • Hyperinflation: When prices rise very fast at double or triple digit rates from
more Than 20 to 100 per cent per annum or more, it is called runaway or
Galloping inflation or hyperinflation. Such a situation brings a total collapse of
monetary system because of the Continuous fall in the purchasing power of
money.
• Semi-Inflation: According to Keynes, so long as there are unemployed resources,
the General price level will not rise as output increases. But a large increase In
aggregate expenditure will face shortages of supplies of some factors Which may
not be substitutable. This may lead to increase in costs and Prices start rising.
This is known as semi-inflation or bottleneck inflation.
• True Inflation: According to Keynes, when the economy reaches the level of full
Employment any increase in aggregate expenditure will raise the price Level in
the same proportion. This is called true inflation.

10. • Suppressed Inflation: When Govt. imposes physical and monetary controls to
check open Inflation, it is known as repressed or suppressed inflation. Of
inflation.
• Mark-up Inflation: As modern labor organizations possess substantial monopoly
power, they Therefore, set prices and wages on the basis of mark-up over costs
and Relative incomes. So also monopoly firms and trade unions.
• Ratchet Inflation: Under ratchet inflation when despite downward pressures in
the economy, Price do not fall.
• Dis inflation: It is the slowing of the rate of inflation temporarily, and it is used to
give details on cases where the inflation rate has been reduced over a short
period. A GDP deflator is used to measure inflation. Deflation is mostly used by
the Federal Reserve to show a period of slowing inflation, and it should not be
confused with the term deflation.

11. • Sectoral Inflation: Sectoral inflation arises initially out of excess demand in
particular Industries. But it leads to a general price rise because prices do not
falling the deficient demand sectors.
• Demand-Pull Inflation: Demand pull or excess demand inflation is a situation
described as “too much money chasing too few goods. “According to Keynes
demand-pull inflation is a post full employment Situation.
• Cost-Push Inflation: It is caused by wage increases enforced by unions and profit
increases by employers.
• Recession-inflation/stagflation:recession-inflation is called Stagflation is a
situation when recession is accompanied by a high rate. recession-inflation is a
situation in which the inflation rate is high or increasing, the economic growth
rate slows, and unemployment remains steadily high.