Inflation:
Inflation is a process in which the price level is rising and the money is losing its value. Inflation occurs when quantity of money in circulation increases beyond the requirements.
Definitions:
Inflation has been defined in different ways by different economists, some of the definitions are as under:
According to R.P.Kent:
“Inflation is nothing more than a sharp upward movement in the price level”.
According to Coulborn:
“Inflation means too much money chasing too few goods”.
According to Pigue:
“Inflation exists when money income is expanding more than in proportion to income earning activities”
Types of Inflation
Inflation can be categorized on the following basis
A) On the basis of Rate of Inflation:
Following are the types of inflation on the bases of rate of inflation.
1. Creeping Inflation
2. Walking Inflation
3. Running Inflation
4. Galloping Inflation
1. Creeping Inflation:
When the increase in the price level is not more than 2% per annum, the inflation is called creeping inflation.
2. Walking Inflation:
In walking inflation, the price level increases more rapidly than in creeping inflation. It may go to 5% p.a.
3. Running Inflation:
A general rise in price level upto 8% to 10% p.a. is called running inflation.
4. Galloping or Hyper Inflation:
In a situation where price level rises very rapidly within a short period of time, the inflation is called galloping inflation.
B) On the basis of Degree of Control
Inflation is classified into the following categories on the basis of degree of control:
1. Open Inflation
2. Suppressed Inflation
1. Open Inflation:
The situation when inflation gets out of control and cannot be suppressed by the government price control or any other similar steps.
2. Suppressed Inflation:
The situation when government is in a position to control inflation by its price control policy.
C) On the basis of Causes
Inflation can be divided into categories on the basis of its causes.
1. Demand Pull Inflation
2. Cost Push Inflation
3. Profit Induced Inflation
4. Budgetary Inflation
5. Monetary Inflation
6. Wage Spiral Inflation
7. Imported Inflation
8. Devaluation Inflation
1. Demand Pull Inflation:
When demand for goods and services is more than their supply, the price level of these goods and services will rise causing demand pull inflation.
2. Cost Push Inflation:
When the cost of production or the remuneration of factors of production increases, there will be an increase in prices causing cost push inflation.
3. Profit Induced Inflation:
Sometimes the businessmen increase the prices of their products only to increase their profit margin. It causes profit induced inflation.
4. Budgetary Inflation:
When the government covers the budget deficit by borrowing money, budgetary inflation will be caused.
5. Wage Spiral Inflation:
Workers often demand increase in wages. If wages are increases, the cost of production will rise and prices of the products will go up. This inflation is called wage spiral inflation.
6. Imported Inflation:
Imported inflation is caused by the increase in the prices of the imported goods which are used as raw material in domestic production.
7. Devaluation Inflation:
Devaluation makes the domestic currency cheaper in terms of foreign currencies. It results in the increased prices. The inflation thus caused is known as devaluation inflation.
Causes of Inflation
Inflation is mainly of two types
1. Demand pull inflation
2. Cost push inflation
1. Demand pulls inflation:
Demand pulls inflation occurs when there is a general increase in price level due to increase in aggregate demand for goods.
2. Cost pushes inflation:
Cost push inflation occurs where there is an increase in the prices due to increase in cost of production.
Causes of Demand Pull Inflation
Following are the causes of demand pull inflation.
A) Deficit financing:
Sometimes government may prepare deficit budget to complete its various projects. The govt. takes loans from various sources to spend on roads, bridges etc. As a result of such projects the income of the people increases but there is no increase in the output of the goods.
B) Decrease in production:
In under-developed countries, the population growth causes low output of goods and services. These factors keep production and output low and cause a rise in prices.
C) Expansion of currency:
When govt. issues currency more than the requirements of the trade in economy, the circulation of currency increases causing inflation.
D) Expansion in credit:
The credit expansion also creates inflation. When commercial banks issue loans to the private an d public sector it results in increase in money supply which increases demand for goods and as a result price level increases.
E) Evils of society:
Black marketing earned by people through evils like smuggling, hoarding, black marketing cause’s inflation.
F) Foreign remittances:
Foreign remittances increase the supply of money of the receiving country without increasing production which results in inflation.
G) Increase in wages:
With the increase in wages, the purchasing power of the people increases which result increase in demand and prices go up.
H) Consumption habits:
Many people of poor countries have consumption habit of rich countries. This trend gives rise to demand and caused inflation.
I) Increase in investment:
Investment gives rise to wages, cost of production and savings. All these factors bring more money and create inflation.
J) Tendency of increasing population:
Increase in population causes increase in demand when demand goes up the price rise.
Causes of Cost Push Inflation
Following are the causes of cost push inflation
A) Increase in wages
B) Rise in price of imported goods
C) Increase in taxes
D) Devaluation
E) Increase in the prices of inputs.
A) Increase in wages:
An increase in wages of individuals increases the income and on the other hand it causes an increase in the cost of production. This increase results in rise in prices.
B) Rise in the price of imported goods:
When the prices of the imported raw material used in local manufacturing increases, the cost of manufacturing goods goes up. This cause inflation.
C) Increase in taxes:
The taxes that the govt imposes on manufacturers increase the cost of production, this again result in the rise in prices.
D) Devaluation:
Devaluation of currency decreases the purchasing power of the local currency. The imported goods become dearer that ultimately increase the cost of production.
E) Increase in price of inputs:
If there is an increase in the price of inputs, raw material, gas, electricity, etc. the cost will go up and result will be increase in inflation.