Types of Inflation is very important for every economics student.Inflation refers to the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Economists categorize inflation into several types based on its cause, rate, and effects. Here are the main types of inflation:
All Types of Inflation According To Economics
- Based on Causes:
- Demand-pull inflation: This occurs when demand for goods and services exceeds their supply. It can be caused by increased consumer spending due to lower interest rates, increased government spending, etc.
- Cost-push inflation: Arises due to the increased cost of production for goods. Causes might include rising wages, increases in the price of raw materials, or supply disruptions.
- Built-in inflation: Also known as wage-price inflation, it occurs when workers demand higher wages and, if they get those higher wages, companies then raise their prices to cover the higher wage costs.
- Based on Rate:
- Creeping or Mild inflation: When the price rise is slow and the annual inflation rate is in the 0-3% range.
- Walking or Moderate inflation: The price rise is moderate, and the annual inflation rate is in the 3-10% range.
- Running inflation: When prices rise at a double or triple-digit pace of 10-20% or more annually.
- Hyperinflation: Extremely high and typically accelerating inflation, often exceeding 50% per month. It quickly erodes the real value of the local currency, as the prices of all goods increase. Examples include post-WWI Germany or Zimbabwe in the late 2000s.
- Based on Effects:
- Anticipated inflation: This is when the rate of inflation is expected and businesses, individuals, and institutions can make proper adjustments. The impacts of such inflation can be minimized through mechanisms like indexing.
- Unanticipated inflation: When inflation rates go beyond what is expected. It can be problematic because businesses, workers, savers, and lenders did not anticipate it, and as a result, long-term contracts, savings, loans, etc., might not account for it.
- Other Types:
- Open inflation: Refers to the rise in prices that happens openly in the form of hiked prices.
- Suppressed inflation: When the government keeps a check on prices and does not allow them to rise, even if there’s a demand-pull. It might result in black markets or non-availability of goods.
- Stagflation: A combination of stagnant economic growth, high unemployment, and high inflation. It’s a paradoxical situation where inflation and unemployment coexist.
- Asset inflation: Increase in the prices of assets like real estate, stocks, etc., without a corresponding increase in the prices of goods and services.
Demand Pull Inflation:-
When inflation is due to excess of demand over aggregate supply, it is called demand pull inflation. Excess of aggregate demand pulls the prices upwards. Aggregate demand exceeds aggregate supply due to following reasons.
- papulation explosion
- increase in exports
- structural backwardness of the economy
- increase in income of the people
- mass migration from the countries
- wars.
Explain types of inflation
Cost Push Inflation:-
Cost push inflation means a situation where prices are rising due to increase in the cost of production even if there is no increase in aggregate demand. Increase in costs pushes the prices upwards. Cost push inflation occurs due to following reasons,
- Increase in wages
- Increase in the prices of the raw material
- New Taxes
- Devaluation Increase in energy prices etc
What Types of Inflation Is not Good For Economy
Mixed inflation
It is the mixture of demand pull and cost push inflation. Originally prices rise due to excessive increase in aggregate demand. Increase in prices raises the cost of living of the workers. In order to compensate high cost of living, workers demand for high wage rates. Demands for high wage rate are generally accepted during the period of rising prices. Increase in wages will raise the cost of production. Therefore Increase in wages will push the prices upward. Combined effect of wages and prices creates hyper inflation. It is known as Price Wage Spiral.
- Creeping Inflation
When the rate of inflation is very slow in the economy, it is called creeping inflation. Due to the creeping nature of prices the economic activities also remain at slow level and economic activities are usually stagnant.
- Mild inflation
When the rate of inflation is reasonable, not too high not too low, it is called mild inflation. This type of inflation usually has healthy effect on economy. It is because prices rise at perceivable rate. It offers more profit, encourages more production and offers more employment.
- Hyper inflation
When prices are rising at abnormal high rate, it is called hyper inflation. This type of inflation was experienced in Germany after Second World War. The price level increase many hundreds time and the purchasing power of people fell to very low level. This type of inflation is very dangerous and it draw to a close production and trade activities the economy.
Each type of inflation has its own set of causes, implications, and potential remedies. Governments and central banks typically monitor inflation rates closely and use tools like monetary policy to try to keep inflation within a desired range.
