In this post, we will explain the concept of inflation and the types of inflation.
Inflation and Types of Inflation –
A sustained rise in the general price level over a period of time is known as inflation. Conversely, a sustained fall in the general price level would be known as deflation.
According to Keynes,
inflation is an imbalance between the aggregate demand and aggregate supply of goods and services. Therefore, if the aggregate demand exceeds the aggregate supply, then the prices keep rising.
Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
Classification of Inflation on the basis of the rate of price :
On the basis of the rate of price rise, inflation is classified into categories. They are –
Creeping or moderate inflation –
When the rate of price rise is less than three per cent per annum, it is called creeping inflation. When prices creep upwards at a moderate rate, inflation serves as an incentive to investment. As a result, the rate of investment, employment, output and aggregate demand rises in the economy and the economy moves into the prosperity phase.
Walking Inflation –
When inflation rate crosses the three per cent mark and remains within single digits i.e. below the 10 per cent mark, it becomes walking inflation. Walking inflation leads to a much rapid fall in the purchasing power of money.
Running Inflation –
When inflation rate is in double digits, it is known as running inflation. When prices begin to rise by more than 10 per cent per annum, the supply of goods and services fall in the economy and their prices begin to rise more rapidly.
Galloping and Hyper inflation –
When prices rise by about 100 per cent annum, the situation is known as galloping inflation and when the inflation rate is over 1000 per cent a year, it is called hyper inflation. Both galloping and hyper inflation signals the collapse of the economy.
Inflation and Types of Inflation
Types of Inflation :
(1) Demand-pull Inflation –
Demand pull inflation takes place due to rise in aggregate demand. In such situation, the aggregate demand for goods and services exceeds the available supply of output which leads price to rise. Aggregate demand may rise due to combined effect of higher demand from the various sectors of the economy such as the firms, households and the government.
According to Keynes, inflation arises when there is an inflationary gap in the economy. Inflationary gap arises when aggregate demand is greater than aggregate supply at full employment level of output. Keynes explained inflation in terms of demand pull forces. When the economy is operating at the full employment level of output, supply cannot increase in response to increase in demand and hence prices rise.
(2) Cost-Push Inflation –
In the absence of rise in aggregate demand, prices may rise due to increase in cost in terms of higher wages, higher input costs and higher profits. These are known to be autonomous increases in costs. Inflation on account of rise in costs is known as Cost push inflation.