Inflation means the condition of a substantial and rapid increase in the general price level which causes a decline in the purchasing power of money. Inflation is statistically measured in terms of percentage increase in the price index per unit of time. There is no generally accepted definition of inflation and different economists define it differently.
According to Crowther, “Inflation is a ‘state’ is which the value of money is falling i.e. the prices are rising”.
According to Fried man, “Inflation is always and everywhere a monetary phenomenon”.
According to Keynes, “Inflation is the result of the excess of aggregate demand over the available aggregate supply and true inflation starts only after full employment”.
Features of Inflation:
- Inflation is always accompanied by a rise in the price level.
- Inflation is a monetary phenomenon and it is generally caused by excessive money supply.
- Inflation is a dynamic process as observed over the long period.
- A cyclical movement of prices is not inflation.
- Pure inflation starts after full employment.
- Inflation may be demand pull or cost push.
- Excess demand in relation to the supply of everything is the essence of inflation.
“Inflation is an excess of the aggregate demand over aggregates supply.”
Inflation is the result of disequilibrium between demand and supply forces and is attributed to (a) an increase in the demand for goods and services in the country, and (b) a decrease in the supply of goods in the economy. Demand pull inflation or excess demand inflation occurs when aggregate demand for goods and services is greater than the available supply of these goods and services at the existing price level.
According to the theory of demand pull inflation, the general price level rises because the demand for goods and services exceeds the supply available at current prices. Demand pull inflation or excess demand inflation occurs when aggregate demand for goods and services is greater than the available supply of these goods and services at the existing price level. Thus, demand pull inflation may be defined as a situation where the aggregate demand exceeds the economy’s ability to supply the goods and services at the current prices.
According to the Keynesians, inflation occurs when aggregate demand for final goods and services exceeds the aggregate supply at full employment level. This can be explained with the help of following diagram.
Thus, as long as the economy is beyond the flat range i.e. SA portion, of the aggregate supply curve, increases in demand will pull the prices up. i.e. create demand pull inflation. So, the inflation is an excess of the aggregate demand over aggregate supply.
KINDS OF INFLATION
1) According to Rate of Rise in Price
i) Creeping inflation: When the rise in prices is very slow like that of a snail or creeper, it called creeping inflation. In terms of speed, a sustained rise in prices of annual increase of less than 3 percent per annum is characterized as creeping inflation. Such an increase in prices is regarded safe and essential for economic growth.
ii) Walking inflation : When the rise in prices becomes more pronounced as compared to a creeping inflation, there exists walking inflation in the economy. Roughly, when prices rise by more than ten percent and within a range of 30 percent to 40 percent over a decade, or 3 to 4 percent a year, walking inflation is the outcome. Walking inflation presents a warning signal for the occurrence of running and galloping inflation.
iii) Running inflation: When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 percent rise in prices over a decade. Thus, when prices rise by more than 10 percent a year, running inflation occurs.
iv) Galloping inflation: In the case of hyperinflation, prices rise every moment, and there is no limit to the height to which prices might rise; therefore, it is difficult to measure its magnitude, as prices rise by fits and starts. If, within a year, the prices rise by 100 percent, it is a case of hyperinflation or galloping inflation.
2. According to the factors influences money supply and demand for goods and services.
i) Excessive money supply inflation: This is classical types of inflation , where there is an excess of money supply in relation to the availability of real goods and service/ This type of inflation is usually conceived with reference to the cyclical fluctuations in the economy, and measures of monetary control to check inflationary of deflationary trends.
ii) Cost inflation: When inflation emerges on account of a rise in factor cost, it is called cost inflation. It occurs when money incomes (wage rate, particularly) expand more than real productivity. Cost inflation has its course through the level of money costs of the factors of production and in particular through the level of wage rates. Due to a rising cost of living index, workers demand higher wages, and higher wages in their turn increase the cost of production, which a producer generally meets by raising prices.
iii) Deficit inflation: When the government budgets contain heavy deficit financing, through creating new money, the purchasing power in the community increases and prices rise. This may be referred to as deficit-induced inflation.
3. War, post-war and peace-time inflation
i) War-time inflation: It is the outcome of certain exigencies of war, on account of increased government expenditure, which is of an unproductive nature. By such public expenditure, the government apportions a substantial production of goods and services out of total availability for war which causes a downward shift in the supply; as a result, an inflationary gap may develop.
ii) Post–war inflation : It is a legacy of war. In the immediate post-war period it is usually experienced. This may happen when the disposable income of the community increases when war-time taxation is withdrawn or public debt is repaid in the post-war period.
iii) Peace time inflation : By this is meant the rise in prices during the normal period of peace. Peace-time inflation is often a result of increased government outlays on capital projects having a long gestation period; so a gap between money income and real wage develops.
4. According to Coverage or scope point of view
i) Comprehensive inflation : When prices of every commodity throughout the economy rise, it is called economy-wide or comprehensive inflation. It is a normal inflationary phenomenon and refers to the rising prices of the general price level.
ii) Sporadic inflation : This is a kind of sectional inflation; it consists of cases in which the averages of a group of prices rise because of increase in individual prices due to abnormal shortage of specific goods. When the supply of some goods becomes inelastic, at least temporarily, due to the physical or structural constraints, the sporadic inflation has its way.
5. Open and Repressed inflation: Inflation is open or repressed according to government
reaction to the prevalence of inflationary forces in the economy.
i) Open inflation: When the government does not attempt to prevent a price rise, inflation is said to be open. Thus, inflation is open when prices rise without any interruption. In open inflation, free market mechanism in permitted to fulfill is historic function of rationing the short supply of goods and distribute them according to consumer’s ability to pay.
ii) Repressed inflation : When the government interrupts a price rise, there is repressed or suppressed inflation. Thus, suppressed inflation refers to those conditions in which price increase are prevented at the present time though adoption of certain measures like price control and rationing by the government, but they rise in future on the removal of such controls and rationing. The essential characteristic of repressed inflation, in contract to open inflation, is that is seeks to prevent distribution system based on controls.
6 Profit inflation: The concept of profit inflation was originated by Keynes in his Treatise on Money. According to Keynes the price level of consumption goods is a function of the investment exceeding savings. The considered the investment boom as a reflection of profit boom. Inflation is unjust in its distribution effect. It redistributes income in favor our of profiteers and against the wagering class.
7. Demand Pull inflation : In a market there is inter-action between the flow of money and flow of goods and services. When more money chases relatively less quantity of goods and services the excess of demand relative to supply pushes up the prices of goods and service. Such inflation, as a result of increased money expenditure; is called demand-pull inflation.
8. Cost-Push Inflation : Often the demand-pull inflation precedes the cost push inflation. When the former sets in there in an increasing demand for factors of production, the prices of these also rise, leading to raise in general prices. It is called cost-push inflation which, however, may also be due to rise in the price of imported material or even be profit inflation when entrepreneurs exploit the scarcity conditions to secure higher monopolistic gains by raising price.
9. Stagflation: The combined phenomenon of demand-pull and cost push inflation is found in many countries, both the developed and the developing. One of these situations is in the form of stagflation under which economic stagnation, in the form of a low rate of growth , combines with the rise in general price level. There are many factors contributing to this situation. The advanced countries may show slow growth on account of the maturing of the economy. But the labor unions are powerful and are successful in bargaining for higher wages which are not in keeping with productivity leading to a situation of stagflation.
In the developing countries, this happens when aggregate demand increased at a fast rate due to high public expenditure and expansion of credit money which is more justified by the increase in real resources. Organized labor exerts its influence in raising up wages thus combining cost-push effect with the demand – pull- inflation.
10. Semi-inflation: According to Keynes, so long as there are unemployed resources, the general price level will not rise as output increased. 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 because of the bottlenecks in supplies of some factors.
11. 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 because it is not possible to increase the supply of factors of production and hence of output after the level of full employment. This is called true inflation.
12. Mark-up-inflation: The concept of mark-up inflation is closely related to the price-push problem. Modern labor organization possess substantial monopoly power. They , therefore, set prices and wages on the basis of mark-up over costs and relative incomes. Firms possessing monopoly power have control over the prices charged by them. So they have administered prices which increase their profit margin. This sets off an inflationary rise in prices. Similarly, when strong trade unions are successful in raising the wages of workers, this contributes to inflation.