What is Inflation: Types, Causes and Effects

What is Inflation: Types, Causes and Effects

What is Inflation? – Get Inflation definition, meaning, causes, impacts on economy

What is Inflation?

Inflation is a popularly asked question in the General awareness section of Bank and Government exams. A little knowledge of inflation will help you solve questions on inflation in the bank exam. Inflation is like an epidemic illness and every government or central bank (RBI) is always trying to keep inflation under control to benefit the people. However, inflation is unavoidable as inflation is eventually bound to happen for essential commodities. Prices of essential commodities have always seen a price rise and could never be inflation proof. In fact, inflation is an entirely unavoidable phenomenon that can hardly ever be reversed more has hardly ever been reversed in the history of any country. However, there are instances where inflation was brought under control and time again common man had to bear the brunt of inflation.

What is inflation?

Inflation is the sustained increase in the general price level of goods and services in an economy over a period. Inflation will lead to an overall increase in the prices of goods. Inflation is measured as an annual change to the percentage of increase in prices of goods or services.

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Under inflation, the prices of goods increase over time and thus the ability to buy goods or services with the same amount of money will reduce. When prices rise and currencies fall, it is known as inflation.

Purchasing power is the number of tangible goods or services that money can buy a given moment of time. Inflation leads to decrease in the purchasing power as it leads to a reduction of the value of currency and increase of prices of goods and services.

It is often heard saying in developing economies like India, that salary is still the same but prices of everything has gone up. So, the question remains – How will you manage with the resources that are there?

Demand-Pull inflation:

According to this hypothesis. An increase in the demand for certain goods increases their prices. If the demand for a goods or services is high and their supply is less, then prices will increase. This happens when economies are growing fast.

Cost-Push Inflation:

The hypotheses states that inflation happens under the circumstances that the production costs of the company manufacturing the goods rises and therefore leading to an increase in the prices of the goods

Monetary inflation:

According to the theory, inflation is caused when there is an increased supply of cash or money in the economy. The influx of cash leads to an inflation in the economy. When the supply of goods is in excess and demand for the goods is less than inflation will go down, or else inflation will go up. However, it is often seen that impact of inflation is often damaging. The influx of money has often led to inflation with some exceptions.

Different Types of Inflation?

Creeping Inflation:

This is a mild type of inflation, when price rise is 3% or less a year. A rise of 2% or less is considered beneficial for economic growth. The creeping inflation makes consumers expect prices will keep rising. Creeping inflation drives economic expansion and growth. However, an inflation higher than 2% can be a sign of danger and must be brought under control.

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Walking Inflation:

Walking inflation is a phenomenon where the price rise is between 3% to 10% a year and it is harmful to the economy. Consumers start purchasing goods and services more than their requirement due to fear of prices in near future. This leads to an increase in demand for goods in the market and challenges the suppliers to keep with the new demand due to inflation. Thus, necessary goods and services often remain out of the reach of the common man.

Galloping Inflation:

The phenomenon leads to a situation where there is more than 10% inflation and this means hell for the economy. Such situations are often seen in the African subcontinent where income come down and businesses cannot keep up with the costs. It leads to instability in the economy and can give rise to an unstable government as people will lose faith in the government. Galloping inflation literally means an inflation which can gallop or tumble over the needs and choices of the common man and must be avoided at all costs. Galloping inflation is often seen in times of war and can also lead to both economic and humanitarian crisis.

Hyperinflation:

Hyperinflation is a rare phenomenon and prices of goods skyrocket more than 50% a month.

 Stagflation:

Stagflation is coined by the combination of stagnation and inflation. There is a stagnation in the economy and there is inflation at a steady pace. It is a combination of economic factors like high unemployment rate, severe inflation, and poor economic growth. It is a struggle and challenge for the central bank(RBI) to bring a sense of normalcy in the economy when there is stagflation. Central banks usually increase interest rates to combat high inflation. However, stagflation can increase unemployment. To keep this under control, Central banks should keep control on their ability to decrease interest rates during stagflation. Currently, India is going through the phase of stagflation – where there is less growth in the job market, and price rise of essential goods leading to a lot of economic complexities and financial distress for the Indian population.

 Core inflation:

The type of inflation impacts rising prices of all commodities except energy and food, due to a phenomenal increase in the price of oil and gas once a year. While global oil prices fluctuate every day, this type of inflation can be more seen when there is an increase in oil prices or energy prices more than expected.

Wage inflation:

Wage inflation occurs when there is a rise in the wage of workers than the cost of living. This is seen in the case of the labor unions demanding higher wages. It can also be seen in the case of the pay commission that recently increased the salaries of central government employees. Wage inflation often arises when there are fewer workers and more work.

Asset inflation:

This is often seen in cities when the price of housing, gold, oil etc increase. There is a boom of a particular asset class like housing or gold. It is overseen by economists who do not consider it as a major instrument or determinant of inflation in general as it only affects people who own an asset class like real estate, gold etc which holds true for more affluent people. However, asset inflation is not like the inflation of certain commodities such as even daily necessities like food.

What are the Benefits of Inflation?:

Inflation is the very reason that people invest in inflation, therefore, inflation should not be demonized. However, it is necessary to control inflation in key areas such as rising prices of food, perishable goods and daily necessities that will not deprive common people of their daily bread. Inflation is required and necessary if it at a steady 2% per annum. There is also a brighter side to inflation which must be looked at.

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