Types of Inflation is very important for every economics student.
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
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
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.