Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’. In other words, inflation is a state of rising prices, but not high prices. It constitutes, thus, an overall increase in the price level. It can, thus, be viewed as the devaluing of the worth of money. In other words, inflation reduces the purchasing power of money. A unit of money now buys less. Inflation can also be seen as a recurring phenomenon.
It is to be pointed out here that inflation is a state of disequilibrium when there is a sustained rise in the price level. It is inflation if the prices of most goods go up. Such rate of increases in prices may be both slow and rapid. However, it is difficult to detect whether there is an upward trend in prices and whether this trend is sustained. That is why inflation is difficult to define in an unambiguous sense.
While measuring inflation, we take into account a large number of goods and services used by the people of a country and then calculate average increase in the prices of those goods and services over a period of time. A small rise in prices or a sudden rise in prices is not inflation since they may reflect the short-term workings of the market.
Let’s measure inflation rate. Suppose, in December 2016, the consumer price index was 193 and, in December 2017, it was 223. Thus, the inflation rate during the last one year was
(223-193) x 100 = 15.54
Types of Inflation:
As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.
Thus, one may observe different types of inflation in the contemporary society:
A. On the basis of Time of Occurrence:
- War–Time Inflation: Inflation that takes place during the period/time of war is wartime inflation. During the war, productive resources are diverted to military needs. Thus, it results in very limited supply and an extreme shortage of essential commodities to the citizens. Production and supply of essential goods slow down and can no longer meet the rising demand from people. Consequently, prices of necessary goods go on rising, resulting in wartime inflation.
- Post–war Inflation: Inflation that occurs soon after the war is called as post – war inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than experienced during the war.
- Peace–Time Inflation: It is due to the enormous expenditure or spending by government on capital projects of a long gestation time.
B. On the basis of coverage and scope:
- Comprehensive or Economy-wide inflation: Comprehensive inflation is when the prices of all commodities rise in the entire economy. Which is also termed as economy-wide inflation.
- Sporadic Inflation: When the prices of a few commodities in some areas rise, it is called as sporadic inflation. It is sectional in nature. For example, an increase in food prices due to bad monsoon (winds that bring seasonal rains in India).
C. On the basis of predictability:
- Anticipated Inflation: Which is also called as expected inflation occurs if the rate of inflation corresponds to what the majority of people are either anticipating or predicting. For example, you know that the prices of household goods may increase for some known factor that has caused the prices of inputs to rise.
- Unanticipated Inflation: It is also known as unexpected inflation. If the rate of inflation stands out of what the majority of people predicted it is said to be unanticipated inflation.
D. On the basis of Rising prices:
- Creeping Inflation: When the price level persistently rises over a period of time at a mild rate it is called as Creeping Inflation or Mild Inflation. According to R.P. Kent, when prices rise, but not more than 3% per annum, it is called as creeping inflation.
- Chronic Inflation: If creeping inflation persists for a long time it is called as chronic inflation. Chronic inflation can either be continuous or intermittent.
- Walking Inflation: When prices rise more than 3% and, but less than 10% per annum, it is called walking inflation. In other words, when the rate of rising prices is more than the creeping inflation, it is known as walking inflation.
- Moderate Inflation: Combination of creeping inflation and walking inflation gives a moderate inflation (single digit inflation rate). According to Prof. Samuelson, it is a stable inflation and is not a serious economic problem.
- Running Inflation: If the change in the price occurs rapidly it leads to running inflation. It occurs when prices rise by more than 10% in a year. Though economists have not suggested a fixed range of measuring, for our better understanding, let’s consider, in 10 years, inflation may record increase in prices of 100%. Range of running inflation may be around 10-20% per annum.
- Galloping Inflation: If the annual rate of inflation exceeds 20% it results in Galloping Inflation. According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 21% or 999% yearly, then it is termed as Galloping inflation.
- Hyper Inflation: When the prices rise at an alarming high rate it is known as hyperinflation. The prices rise so fast that it becomes difficult to measure its magnitude. However, in quantitative terms, when the prices rise above 1000% per annul, it is called as hyperinflation.
E. On the basis of government reaction:
- Open Inflation: In a free market economy, where prices are allowed to take its course and government does not attempt to restrict inflation, open inflation occurs. Thus, inflation is open when the prices grow without any time-out.
- Suppressed Inflation: Suppressed inflation is when temporary measures are taken to prevent the inflation through price controls and rationing, etc. In such cases, prices of basic essentials are fixed by the government by introducing price controls on the commodities. Thus, where prices are suppressed by price control, it is suppressed inflation.
F. On the basis of miscellaneous causes:
- Demand-Pull Inflation: Demand-pull Inflation is when aggregate demand for a good or service exceeds aggregate supply. It starts with an increase in consumer demand. Typically, sellers meet such an increase with more supply. But when additional supply is unavailable, sellers raise their prices. That results in demand-pull Inflation.
- Cost-Push Inflation: When prices rise due to the growing cost of production of goods and services, it is known as cost-push inflation. For example, if the wages of workers get raised, then the unit cost of production also increases. As a result, the prices of end products manufactured and supplied are consequently hiked.
- Sectoral Inflation: When there is a rise in the prices of goods and services produced by certain sectors of the industries, then it is said to be sectoral inflation. For instance, if prices of the crude oil increase, it will have an effect on other sectors like aviation and road transportation which are directly dependent on the oil industry.
- Administrated price Inflation: It is also called as Pricing Power Inflation. It takes place when entrepreneurs increase the prices of their products to boost their profits. It does not occur during a financial crisis and economic depression. It is also known as oligopolistic inflation, as oligopolies have an ability to set prices of their goods and services.
- Foreign Trade induced Inflation: It is of two types:
Export-Boom Inflation: If the exports of a country increase considerably it may lead to shortage of those products in its own territory which results in price rise within the exporting country.
Import Price-Hike Inflation: If a country imports goods from a foreign country and the prices of those goods increases due to inflation abroad, then the prices of domestic products using imported goods will also raise.
For Example: India imports crude oil from Iran at $100 per barrel. Oil prices in the international market suddenly increase to $150 per barrel. Now India has to pay the additional $50 per barrel to get the same amount of crude oil. When the expensive oil reaches India, manufacturing and transportation cost gets included and finally the Indian customers have to pay more.
It is in the end-customer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation.
- Profit Inflation: It occurs when there is a rise in profit levels of companies.
- Wage Inflation: If the rise in wages is not accompanied by an increase in output, i.e. production, prices rise. Thus, it leads to rise in inflation rate.
- Tax Inflation: If the burden of indirect tax increases, sellers charge high prices to the customers, which will raise the rate of inflation.
- Development inflation: In the process of the development of an economy, people’s income increases, which causes an increase in demand and finally leading to rise in prices, where inflation starts to creep upwards.
- Build-In Inflation: Build-In Inflation includes adaptive expectations of works and employees who try to push up their salaries and wages. Employer raises the prices for their goods and services in anticipation of the workers and employees demands. These overall forms a vicious cycle of raising wages followed by an increase in the general price level of commodities.
- Population Inflation: It occurs when the prices increase due to a rapid growth in population.
- Fiscal Inflation: It takes place due to excessive expenditure of government when there is a budget deficit.
- Deficit Inflation: It occurs due to deficit budget of the government.
- Credit Inflation: It takes place due to excessive bank credit or bank loans and excessive money supply in the economy.