KINDS OF INFLATION
Inflation is of different types. It is generally classified on the following basis:
(1) On the Basis of Rate of inflation
Inflation on this basis is grouped as (i) Creeping inflation (ii) Walking inflation (iii) Running inflation and (iv) Hyper inflation.
(i) Creeping inflation. is a situation in which the rise in general price level is at a very slow rate over a period of time. Under creeping inflation, the price level rises up to a rate of 2 percent per annum. A mild inflation is generally considered a necessary condition of economic growth.
(ii) Walking inflation. Walking inflation is a marked increase in the rate of inflation as compared to creeping inflation. The price rise is around 5 percent annually.
(iii) Running inflation. Under running inflation, the price increase is about 8 to 10 percent per annum.
(iv) Galloping or Hyper Inflation. Galloping inflation is a full inflation. Keynes calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rises very rapidly within a short period.
(2) On the Basis of Degree of Control:
On the basis of degree of control over the rise in price level, the inflation can be identified as (i) Open Inflation (ii) Suppressed Inflation
(i) Open Inflation. It is a stage when the rise in price level gets out of control. Milton Friedman describes it as, “inflationary process in which prices are permitted to rise without being suppressed by government price control or similar measures.
(ii) Suppressed Inflation. Under this type of inflation, the government makes efforts to check and control the rise in price level through price control and rationing.
When the price level is suppressed by the above short term measures, it results in many evils such black marketing, hoarding, corruption and profiteering.
(3) Inflation on the Basis of Causes:
Inflation on the basis of causes is classified as under:
(i) Demand Pull Inflation. Inflation caused by increase in aggregate demand, not matched by aggregate supply of goods, resulting in rise of general price level, is called Demand Pull Inflation. Demand pull inflation, to be more simple, occurs when the demand for goods and services in the country is more than their supply. The effective demand for goods increases due to many factors such as increase in money supply, increase in the demand for goods by the government, increase in the income of various factors of production etc. In short, the excessive increase in the money supply causes inflationary conditions. Demand pull inflation is generally characterized by shortage of goods and shortage of workers.
(ii) Cost Push Inflation. Cost push inflation occurs when the increasing cost of production pushes up the general price level. Cost pull inflation occurs when the economy is below full employment with prices rising even though there is no shortage of goods. Cost push inflation is the result of increase in wage costs unaccompanied by corresponding increase in productivity, rise in import prices of goods, depreciation in the external.va of the currency, higher mark up etc., etc.
(iii) Profit Induced Inflation. Profit inflation is in fact categorized under cost push inflation. When entrepreneurs, due to their monopoly position raise the profit margin on goods, it may cause profit push inflation.
(iv) Budgetary Inflation. When the government of a country covers the deficits in the budgets through bank borrowing. and creating new money (Deficit financing), the purchasing power of the community increases without a simultaneous increase in the production of goods. This leads to rise in the general price level.
(v) Monetary inflation. Milton Firedman is of the firm view that inflation is always and anywhere a monetary phenomenon. According to him, inflation is caused by a too rapid increase in the money supply and by nothing else.
(vi) Multi Casual inflation. Inflation has a number of causes. It may be caused by increase in money supply, excessive wage demands, excess aggregate demand for goods, shortage of goods etc. The chief cause of inflation in one year may not be in the next year. Since inflation is multi casual, therefore, a variety of policy measures are needed to deal with it.
(4) On the Basis of Employment.
(i) Inflation can also be categorized on the basis of employment as (i) Partial inflation and (ii) Full inflation Partial inflation, according to J. M. Keynes, takes place when the general price level rises partly due to an increase in the cost of production of goods and partly due to rise in supply of money before the full employment stage is reached.
(ii) Full inflation Full inflation prevails when the economy has reached t level of full employment. Any increase in money supply beyond full employment level will result in the rise in price level without any increase in output and employment. It is also called as real inflation.
As regards the causes, it is one of the key areas of disagreement among modern economist. However, two main explanations of inflation are given which are described in brief below:
(5) Anticipated versus unanticipated inflation:
(i) Anticipated inflation is the rate of inflation which majority of the individuals believes will occur. When the rate of inflation (say 6%) turns out to be the same (6%), we are then in a situation of fully anticipated inflation.
(ii) Unanticipated inflation is that which comes as surprise to majority of individuals. It can be higher or lower than the rate of anticipated inflation.
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