What are the different Types of Inflation?
What is Inflation?
Inflation is the rise in the prices of goods and services with time. Inflation is measured by the Customer price index CPI and the WPI, Wholesale Price Index. The main cause of inflation in an economy is as follows:
- Increase in public spending
- Increase in money supply in the economy
- Government spending
- The imposition of indirect taxes
- Population growth
- Price rise in the international market.
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What are the different Types of Inflation?
Types of Inflation:
Inflation is of various types and is determined based on different parameters. It is important to have some level of inflation in an economy as deflation can have a negative effect. Discussed below are the various types of inflation:
- Creeping Inflation: Creeping inflation can be defined as the situation, where inflation in an economy increases in a slow way. It is a type of mild inflation with rise in inflation at 3% or less a year. According to experts, a price rise at 2% a year is beneficial to the economy. This indicates that the prices will keep rising in the future. Creeping inflation is what the government needs to maintain a stable economy.
- Walking Inflation: Walking inflation is also known as trotting inflation. The effects of walking inflation are a moderate rise in the prices of products at a rate of 3-10% a year. Walking inflation is a bad sign and the government must control it, else it can turn into galloping inflation.
- Galloping Inflation: Galloping inflation refers to a state in the economy when the prices of goods increase at a rapid rate of 10% or more. Currency loses its value and citizens are not able to keep up with the rise in the cost of goods and services. It has an adverse effect on the middle and the low-income group. It causes serious economic imbalance and requires strict measures for control.
- Hyperinflation: Hyperinflation is experienced by an economy when there is a rapid rise in the price of goods at a rate of 50% a month. The main cause of hyperinflation is the rise of money supply in an economy which is not supported by GDP growth. Hyperinflation is a rare phenomenon. The recent economies to be hit by hyperinflation were Zimbabwe in 2000 and Venezuela in 2010.
- Stagflation: Stagflation is a condition in the economy where high inflation is accompanied by unemployment and stagnant economic growth. Stagflation is a rare phenomenon and was witnessed only once in the 1970s when the United States abandoned the gold standards.
- Deficit-induced inflation: This inflation occurs when the price rises due to a deficit in government expenditure. During war or development planning, the government is compelled to print fiat currency for covering the budget deficit. However, the production of goods and services cannot be increased at the same time, resulting in a rise in prices, known as deficit-induced inflation.
- Credit Inflation: Inflation which develops owing to excessive expansion of bank credit is called credit inflation.
- Core Inflation: Core inflation or headline inflation is measured as the rise in prices of goods and services except food and energy. The measure of core inflation does not include food and energy sector as the prices of these are very volatile. Core inflation is measured using consumer price index (CPI).
- Demand-pull inflation: Demand-pull inflation occurs when spending is more on a limited supply of goods that can be produced at full employment, which ultimately pulls up prices and wages. In such a situation, the prices rise due to higher demand caused by larger spending for the limited amount of goods available during the full employment period.
- Cost-push inflation: Cost-push inflation occurs when the rise in prices are due to an increase in the cost of productive services, like an increase in the cost of imported or indigenous raw materials, labor services and so on.
- Wage Push Inflation: Wage-induced inflation arises when the prices rise persistently under the impact of an increase in wages. If wages are raised under the pressure of trade unions to meet the higher cost of living, the purchasing capacity of workers increases. But, if the supply of goods does not increase proportionately, the prices of goods also rise. This type of inflation is called wage-induced inflation.
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