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Inflation

In economics, inflation is increased money supply, and often causing a sustained increase in the
general price level of goods and services in an economy over a period of time by "Too much
money chasing too few goods", as common acknowledge by modern people.[1]
When the price level rises, each unit of currency buys fewer goods and services. Consequently,
inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the
medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation
is the inflation rate, the annualized percentage change in a general price index (normally
the consumer price index) over time.[4] The opposite of inflation is deflation.
Inflation affects an economy in various ways, both positive and negative. Negative effects of
inflation include an increase in the opportunity cost of holding money, uncertainty over future
inflation which may discourage investment and savings, and if inflation were rapid enough,
shortages of goods as consumers begin hoarding out of concern that prices will increase in the
future. Positive effects include reducing the real burden of public and private debt, keeping
nominal interest rates above zero so that central banks can adjust interest rates to stabilize the
economy, and reducing unemployment due to nominal wage rigidity.[5]
Economists generally believe that high rates of inflation and hyperinflation are caused by an
excessive growth of the money supply.[6] However, money supply growth does not necessarily
cause inflation. Some economists maintain that under the conditions of a liquidity trap, large
monetary injections are like "pushing on a string".[7][8] Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate inflation may be attributed to
fluctuations in real demandfor goods and services, or changes in available supplies such as
during scarcities.[9] However, the consensus view is that a long sustained period of inflation is
caused by money supply growing faster than the rate of economic growth. [10][11]
Today, most economists favor a low and steady rate of inflation.[12] Low (as opposed to zero
ornegative) inflation reduces the severity of economic recessions by enabling the labor market to
adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary
policy from stabilizing the economy.[13] The task of keeping the rate of inflation low and stable is
usually given tomonetary authorities. Generally, these monetary authorities are the central
banks that control monetary policy through the setting of interest rates, through open market
operations, and through the setting of banking reserve requirements.[14]

Measures
The inflation rate is widely calculated by calculating the movement or change in a price index,
usually the consumer price index.[34] The inflation rate is the percentage rate of change of a price
index over time. The Retail Prices Index is also a measure of inflation that is commonly used in
the United Kingdom. It is broader than the CPI and contains a larger basket of goods and services.
To illustrate the method of calculation, in January 2007, the U.S. Consumer Price Index was
202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage
rate inflation in the CPI over the course of the year
is:

The resulting inflation rate for the CPI in this

one-year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by
approximately four percent in 2007.[35]
Other widely used price indices for calculating price inflation include the following:

Producer price indices (PPIs) which measures average changes in prices received by
domestic producers for their output. This differs from the CPI in that price subsidization,
profits, and taxes may cause the amount received by the producer to differ from what the
consumer paid. There is also typically a delay between an increase in the PPI and any eventual
increase in the CPI. Producer price index measures the pressure being put on producers by the
costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by
profits, or offset by increasing productivity. In India and the United States, an earlier version of
the PPI was called the Wholesale Price Index.

Commodity price indices, which measure the price of a selection of commodities. In the
present commodity price indices are weighted by the relative importance of the components to
the "all in" cost of an employee.

Core price indices: because food and oil prices can change quickly due to changes
in supply and demand conditions in the food and oil markets, it can be difficult to detect the
long run trend in price levels when those prices are included. Therefore, most statistical
agencies also report a measure of 'core inflation', which removes the most volatile components
(such as food and oil) from a broad price index like the CPI. Because core inflation is less
affected by short run supply and demand conditions in specific markets, central banks rely on it
to better measure the inflationary impact of current monetary policy.
Other common measures of inflation are:

GDP deflator is a measure of the price of all the goods and services included in gross
domestic product (GDP). The US Commerce Department publishes a deflator series for US
GDP, defined as its nominal GDP measure divided by its real GDP measure.


Regional inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to
different regions of the US.

Historical inflation Before collecting consistent econometric data became standard for
governments, and for the purpose of comparing absolute, rather than relative standards of
living, various economists have calculated imputed inflation figures. Most inflation data before
the early 20th century is imputed based on the known costs of goods, rather than compiled at
the time. It is also used to adjust for the differences in real standard of living for the presence of
technology.

Asset price inflation is an undue increase in the prices of real or financial assets, such
as stock (equity) and real estate. While there is no widely accepted index of this type, some
central bankers have suggested that it would be better to aim at stabilizing a wider general price
level inflation measure that includes some asset prices, instead of stabilizing CPI or core

and lowering them when these asset prices fall. and so the formula does not necessarily imply a stable short-run relationship between the money supply and nominal output.inflation only. says that any change in the amount of money in a system will change the price level. simply stated. In this formula. velocity is not exogenous in the short run. The formula is an identity because the velocity of money (V) is defined to be the ratio of final nominal expenditure ( ) to the quantity of money (M). With exogenous velocity (that is.[dubious – discuss] Monetarist view Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. They consider fiscal policy. the general price level is related to the level of real economic activity (Q). as ineffective in controlling inflation." [58] Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The quantity theory of money. the money supply determines the value of nominal output (which equals final expenditure) in the short run. velocity being determined externally and not being influenced by monetary policy). in the long run. is an index of the real value of final expenditures. is the general price level. If velocity is relatively unaffected by monetary policy. central banks might be more successful in avoidingbubbles and crashes in asset prices. This theory begins with the equation of exchange: where is the nominal quantity of money. "Inflation is always and everywhere a monetary phenomenon. In practice. is the velocity of money in final expenditures. the quantity of money (M) and the velocity of money (V). and the real value of output is determined in the long run by the productive capacity of the economy. or government spending and taxation. Monetarists assume that the velocity of money is unaffected by monetary policy (at least in the long run). the primary driver of the change in the general price level is changes in the quantity of money. The reason is that by raising interest rates when stock prices or real estate prices rise. Under these assumptions. the long-run rate of increase in prices (the inflation rate) is equal to the long-run growth rate of the money supply plus the . However. changes in velocity are assumed to be determined by the evolution of the payments mechanism.[57] The monetarist economist Milton Friedman famously stated.

 Cost-push inflation. Causes of Inflation Inflation means there is a sustained increase in the price level. etc. any factor that increases aggregate demand can cause inflation. Another (although much less common) cause can be a rapid decline in the demand for money.[citation needed]  Built-in inflation is induced by adaptive expectations. also called "supply shock inflation. and is often linked to the "price/wage spiral".[10] Keynesian view Keynesian economics proposes that changes in money supply do not directly affect prices. leading to a 'vicious circle'. in the long run. as part of what Robert J. For example. Demand inflation encourages economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. as happened in Europe during the Black Death. Hence. Built-in inflation reflects events in the past. Demand-pull theory states that inflation accelerates when aggregate demand increases beyond the ability of the economy to produce (its potential output). Gordon calls the "triangle model":[52]  Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending.exogenous long-run rate of velocity growth minus the long run growth rate of real output. There are three major types of inflation. Another example stems from unexpectedly high Insured losses. or in the Japanese occupied territories just before the defeat of Japan in 1945. and so might be seen as hangover inflation. either legitimate (catastrophes) or fraudulent (which might be particularly prevalent in times of recession). This may be due to natural disasters. leading to increased oil prices.[53] However. and that visible inflation is the result of pressures in the economy expressing themselves in prices." is caused by a drop in aggregate supply (potential output). a sudden decrease in the supply of oil. can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply side factors) . It involves workers trying to keep their wages up with prices (above the rate of inflation). or increased prices of inputs. aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy. and firms passing these higher labor costs on to their customers as higher prices.

(higher wages may also contribute to rising demand) 2. As firms reach full capacity. there was a spike in the price of oil to over $150 causing a temporary rise in inflation. A devaluation / depreciation means the Pound is worth less. E. they respond by putting up prices. 3. Demand pull inflation If the economy is at or close to full employment then an increase in AD leads to an increase in the price level. workers can get higher wages which increases their spending power. If there is a devaluation then import prices will become more expensive leading to an increase in inflation. Also. Rising wages If trades unions can present a common front then they can bargain for higher wages. leading to inflation. Cost push inflation can be caused by many factors 1. if the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost push inflation. The long run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity. Profit Push Inflation . Import prices One third of all goods are imported in the UK. Raw Material Prices The best example is the price of oil. 4. if economic growth is above the long run trend rate of growth. in early 2008. therefore we have to pay more to buy the same imported goods.g. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. near full employment. AD can increase due to an increase in any of its components C+I+G+X-M We tend to get demand pull inflation.1.

This can indirectly cause demand pull inflation Printing more money If the Central Bank prints more money. If there is more money chasing the same amount of goods. There is even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases. This is because the money supply plays an important role in determining prices. this invariably leads to higher prices. an increase in the money supply may just be saved. Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from . Inflation can come from both the demand and the supply-side of an economy Inflation can arise from internal and external events Some inflationary pressures direct from the domestic economy.When firms push up prices to get higher rates of inflation. such as VAT and Excise duty. it is possible to increase the money supply without causing inflation. and therefore CPI will increase. 6. Inflation can also come from external sources. Higher taxes If the government put up taxes. these tax rises are likely to be one-off increases. 5. A rise in the rate of VAT would also be a cause of increased domestic inflation in the short term because it increases a firm's production costs. Hyperinflation is usually caused by an extreme increase in the money supply However. e. or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets. but they can cause a positive wealth effect and encourage consumer led economic growth. Declining productivity If firms become less productive and allow costs to rise. However. foodstuffs and beverages. banks don’t increase lending but just keep more bank reserves. What else could cause inflation? Rising house prices Rising house prices do not directly cause inflation. This is more likely to occur during strong economic growth. you would expect to see a rise in inflation. then prices will rise. for example the decisions of utility businesses providing electricity or gas or water on their tariffs for the year ahead. this will lead to higher prices. in exceptional circumstances – such as liquidity trap / recession. for example a sustained rise in the price of crude oil or other imported commodities. This is because in recession.g.

This is also known as a “wage-price effect" . There are many reasons why costs might rise: 1. A recent example has been a surge in the world price of wheat. producers can raise their prices and achieve bigger profit margins Demand-pull inflation becomes a threat when an economy has experienced a boom with GDP rising faster than the long-run trend growth of potential GDP Demand-pull inflation is likely when there is full employment of resources and SRAS is inelastic Main Causes of Demand-Pull Inflation 1. If consumers buy fewer imports.e. this could be a cause of cost-push inflation 3. lower direct or indirect taxes or higher government spending. One of the dangers of a pick-up in inflation is what the Bank of England calls “second-round effects" i. Higher demand from a fiscal stimulus e. When people see prices are rising for everyday items they get concerned about the effects of inflation on their real standard of living. by increasing prices to protect their profit margins. This might be because of a rise in commodity prices such as oil. If direct taxes are reduced.g. A depreciation of the exchange rate increases the price of imports and reduces the foreign price of a country's exports.caused by wage increases. Monetarist economists believe that inflation is caused by “too much money chasing too few goods" and that governments can lose control of inflation if they allow the financial system to expand the money supply too quickly. Fast growth in other countries – providing a boost to UK exports overseas. AD in will rise – and there may be a multiplier effect on the level of demand and output 2.Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index Demand-pull inflation Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap When there is excess demand. consumers have more disposable income causing demand to rise. Export sales provide an extra flow of income and spending into the UK circular flow – so what is happening to the economic cycles of other countries definitely affects the UK Cost-push inflation Cost-push inflation occurs when firms respond to rising costs. Wages might increase when people expect higher inflation so they ask for more pay in order to protect their real incomes.g. copper and agricultural products used in food processing. which are greater than improvements in productivity. Monetary stimulus to the economy: A fall in interest rates may stimulate too much demand – for example in raising demand for loans or in leading to house price inflation. Higher government spending and increased borrowing creates extra demand in the circular flow 3. 4. an initial rise in prices triggers a burst of higher pay claims as workers look to protect their way of life. while exports grow. 2. an increase in the prices of raw materials and other components. Rising labour costs . Trade unions may use their bargaining power to bid for and achieve increasing wages. Component costs: e. Expectations of inflation are important in shaping what actually happens to inflation. Wage costs often rise when unemployment is low because skilled workers become scarce and this can drive pay levels higher.

Other causes of cost-push inflation are increases in indirect taxes. Another important reason is increase in the cost of raw materials. Higher costs of production shift the AS curve to the left and this movement forces up the price level. 9. most notably oil. 1. they will usually raise their prices to maintain their profit margins. 5. 11. components and finished products 6. therefore. can change the price by large amounts. inflation rates of other countries and the action taken by the government to offset its effects. Three main causes of inflation derived by economists are as follows: 1. . A fall in the exchange rate – this can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials. leading to a wageprice spiral. suppliers may choose to pass on the burden of the tax onto consumers. Demand-pull Inflation 3. Monopoly employers/profit-push inflation – where dominants firms in a market use their market power (at whatever level of demand) to increase prices well above costs 7. Cost-push Inflation 2. demand. Cost-push Inflation: 10. as shown in Fig. such a rise can have a significant impact on the price level. Some raw materials. There are a number of reasons for an increase in costs. Cost-push inflation can be illustrated on an aggregate demand and aggregate supply diagram. Cost-push inflation occurs when the price level is pushed up by increases in the costs of production. These are cost-push. Depending on the price elasticity of demand and supply for their products. Monetary Inflation! 8. or a rise in Value Added Tax. 1. One is wages increasing more than labour productivity. fuels and cigarettes. Higher indirect taxes – for example a rise in the duty on alcohol. This will increase labour costs. Inflation is not a random increase in the general price level. The initial rise in the price level is likely to cause workers to press for even higher wages. Economists divide the causes into three main categories.4. 13. As labour costs form the highest proportion of total costs in many firms. While examining the causes of inflation. but also its rate. it is necessary to consider the reasons for a rise in the price level over a period of time. If firms face higher costs. It will also not be a one-off increase. The consequences of inflation can not only be influenced by its cause. higher cost of capital goods and increase in profit margins by firms.pull and monetary. 12.

Demand-pull Inflation: 15. Such an increase in aggregate demand will not necessarily cause inflation.14. higher aggregate demand will result in higher output but no increase in the price level. 2. any rise in demand will be purely inflationary as shown in Fig. then aggregate supply may not be able to rise in line with aggregate demand and inflation occurs. As a result. . the economy is experiencing a shortage of some resources. if aggregate supply can extend to match it. however. 17. Demand-pull inflation occurs when the price level is pulled up by an excess demand. Aggregate demand for a country’s products can increase due to higher consumption. higher investment. When the economy has plenty of spare capacity. higher government expenditure or higher net exports. 16. In a situation of full employment of resources it would not be possible to produce any more output. 2. If. with unemployed workers and unused machines. for example – skilled workers.

both sides must be equal as both represent total expenditure. The list is as follows: 1. Types of Inflation Here are different types of inflation depicted and listed below. If the money supply increases by 50% to $150bn and output and the velocity of circulation remain unchanged. and Sporadic Inflation.18. 21. By definition. b. For example. . monetarists examine the relationship between the money supply and the velocity of circulation on one hand and the price level and output on the other. If an output of $200bn products is produced. people will spend more and this will lead to an increase in prices. believe that the only cause of inflation is the money supply increasing faster than output. a. if the money supply is $100bn and. Monetary Inflation: 19. 20. appropriately called monetarists. excess demand is created by an excessive growth of the money supply. 3. each dollar changes hands four times. on average. a total of $400bn will be spent. Monetary inflation is a form of demand-pull inflation. In this case. the average price would rise to $3 ($150bn x 4/200bn). In explaining their view. They argue that if the money supply increases. A group of economists. Coverage or scope: Comprehensive or Economy-Wide Inflation. the average price would be $2 (200bn x $2 = $400bn).

a. 5. o. 4. Rising prices: Creeping. Galloping or Jumping Inflation. f. Administered Price or Oligopolistic Inflation. j. Demand-Pull or Excess Demand Inflation. Different causes: Deficit Inflation. d. g.2. Post-War Inflation. p. c. b. Chronic or Secular Inflation. Population Inflation. Walking or Trotting Inflation. Now let's discuss each type of inflation one by one. k. Time of occurrence: War-Time Inflation. d. f. 3. Sectoral Inflation. Wage Inflation. and Hyperinflation. n. and Peace-Time Inflation. c. Development Inflation. a. g. Mild or Low Inflation. Expectation or predictability: Anticipated or Expected Inflation. i. Tax Inflation. q. c. h. e. Fiscal Inflation. Moderate Inflation. and Unanticipated or Unexpected Inflation. and Import Price-Hike Inflation. l. e. Export-Boom Inflation. Credit Inflation. m. b. a. Pricing Power. Running Inflation. Import Price-Hike Inflation. The types of inflation based on coverage or scope: . Government's reaction or control: Open Inflation. a. and Cost-Push (Supply-side) Inflation. and Suppressed or Repressed Inflation. b. 6. b. Build-In Inflation. Foreign Trade Induced Inflation: Export-Boom Inflation. i. Profit Inflation. ii. Scarcity Inflation. a. b.

scant productive resources are all diverted and prioritized to manufacture military goods and equipments. Overall it results in very limited supply and extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of needed goods slow down and can no longer meet the soaring demand . War-Time Inflation: Inflation that takes place during the period of a warlike situation is Wartime Inflation. During war. 2. it is called Sporadic Inflation. It is sectional in nature. it is known as Comprehensive Inflation. increase in food prices due to bad monsoon (winds that bring seasonal rains in India). Sporadic Inflation: Time when prices of only a few commodities in some regions (areas) rise. Comprehensive Inflation: When the prices of all commodities rise in the entire economy.1. 1. The types of inflation based on the time or period of occurrence: Image credits © Gaurav Akrani. Economy-Wide Inflation is its another name. For example.

It is due to enormous government expenditure or spending on capital projects of a long gestation (development) time. 2. it becomes Open Inflation. etc. prices of necessary goods keep on rising in the market. rationing. It then leads to corruption.. resulting in a faster hike in prices than what experienced during the war. After the war. Consequently. 3. However. black marketing. it is known as an Open Inflation. where prices are allowed to take its course. when government removes its controls. it is known as Peacetime Inflation. resulting in Wartime Inflation. The types of inflation based on the government's reaction or its degree of control: 1. Repressed Inflation is its another name. etc. government controls are relaxed. Suppressed Inflation: When government prevents the price rise through price controls. Post-War Inflation: Inflation that takes place soon after a war is a Post-War Inflation.from people. artificial scarcity. The types of inflation based on the rising prices: . 2. Open Inflation occurs. In a free-market economy. it is known as Suppressed Inflation. Peace-Time Inflation: When prices rise during the peace period. Open Inflation: When government does not attempt to restrict inflation.

Galloping Inflation: According to Prof. we must take Walking Inflation seriously as it gives a cautionary signal for the occurrence of Running inflation. Jumping Inflation is its another name. we may consider a price increase between 10% to 20% per annum (double-digit inflation rate) as a Running Inflation. 6. 2. between 3%. Samuelson. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. Walking Inflation: When the rate of rising prices is more than the Creeping Inflation. 3. it is referred as Creeping Inflation. Trotting Inflation is its another name. It happens when prices rise by less than 10% per annum (single digit inflation rate). Samuelson clubbed together concept of Creeping and Walking inflation into Moderate Inflation. Running Inflation: A rapid acceleration in the rate of rising prices is called Running Inflation. but less than 1000% per annum (i. if. The prices rise so fast that it becomes very difficult to measure its magnitude. then it possibly leads to Hyperinflation. Creeping Inflation: When prices are gently rising. but less than 10% per annum (i. It is named chronic because if an inflation rate continues to grow for a longer period without any downturn.. in . it is called as Walking Inflation. 5. However. it is called Creeping Inflation. Between 20% to 1000% per annum). Furthermore. 7. Up to) 3% per annum (year).P. and 10% per annum).1. According to him.e. it is a stable inflation and not a serious economic problem. if prices rise by dual or triple digit inflation rates like 30% or 400% or 999% yearly. According to R. Chronic-Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). when prices rise by not more than (i.e. then it is often called as Chronic or Secular Inflation. Though economists have not suggested a fixed range for measuring running inflation. When prices rise by more than 3%. it can eventually result in Galloping Inflation. it is known as Walking Inflation. According to some economists. not checked in due time. then the situation can be termed as Galloping Inflation. Kent. It occurs when prices rise by more than 10% in a year. India has been witnessing it from second five-year plan period. Moderate Inflation: Prof. Galloping Inflation occurs. 4. Chronic Inflation: If creeping inflation persists (continues to increase) for a longer period. When prices rise by more than 20%. Hyperinflation refers to a situation where the prices rise at an alarming high rate.e.

In the above figure. Following is a conceptual graph on Creeping. Walking. it is termed as Hyperinflation. It is roughly made only to get an understanding of how the actual figure will appear if plotted to scale. .quantitative terms. Two worst examples of hyperinflation recorded in the world history are of those experienced by Hungary in the year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe's regime. X-axis represents the time in years or annum. Galloping. 1. It is a Moderate Inflation. OB is an addition of OA and AB. BC is a Running Inflation from 10 to 20%. 3. Note: Graph is not drawn to scale. when prices rise above 1000% per annum (quadruple or four-digit inflation rate). AB is a Walking Inflation from 3 to 10%. DE is a Hyperinflation from 1000% and above. Paper money becomes worthless. 7. the value of the national currency (money) of an affected country reduces almost to zero. and people start trading either in gold and silver or sometimes even use the old barter system of commerce. and Moderate Inflation. 8. OA is a Creeping Inflation from 0 to 3%. 6. During a worst-case scenario of hyperinflation. Y-axis implies percentage (%) increase or rise in price. Hyperinflation. 5. Running. 2. CD is a Galloping Inflation from 20 to 1000%. 4.

it is referred as Administered Price Inflation. As Oligopolies have an ability to set prices of their goods and services. sellers charge high price to the consumers. some crooked merchants often get themselves engaged in it. 3. It does not occur during a financial crisis and economic depression. This overall forms a vicious cycle of rising wages followed by an increase in general prices of commodities. 4.The types of inflation based on different or miscellaneous causes: 1. and not seen when there is a downturn in the economy. If this cycle continues. . 8. 5. prices rise. Scarcity Inflation occurs due to hoarding. kerosene. etc. Employers and Organizations raise the prices of their respective goods and services in anticipation of the workers or employees' demands. Hoarding is an excess accumulation of necessary commodities by unscrupulous traders and black marketers. Credit Inflation occurs due to excessive bank credit or the money supply in the economy. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. With an intention to sell them only at higher prices to make huge profits during Scarcity Inflation. 6. Profit Inflation: When entrepreneurs are interested in boosting their profit margins. It is practiced to create an artificial shortage of essential goods like food grains. it is also called as an Oligopolistic Inflation. 7. then it keeps on accumulating inflation at each round turn and thereby results in a Build-In Inflation. prices rise. Build-In Inflation: Vicious cycle of Build-In Inflation gets induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation. 2. Tax Inflation: Due to the rising indirect taxes. Deficit Inflation takes place due to deficit financing. Wage Inflation: If the rise in wages in not accompanied by an increase in output. Though hoarding is an unfair trade practice and a punishable criminal offense still. Pricing Power Inflation: Usually.

exploding population. then the prices of domestic products using imported goods also rise.. Import Price-Hike Inflation: If a country imports goods from a foreign country and the prices of these goods increases due to inflation abroad. leads to aggregate demand and exceeds aggregated supply. For example. Population Inflation: Prices rise due to a rapid increase in population. 17. 11. If the oil prices in the international market fall. 13. income increases. results in a rise in the prices of domestic goods being manufactured and transported. 16. Export-Boom Inflation. Demand-Pull Inflation: Inflation. 12. air ticket fares and road transportation cost will increase. 14. Export-Boom Inflation: Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). and vice-versa. Foreign Trade Induced Inflation: It has two categories. For instance.) which are directly dependent on the oil industry. For example. Sectoral Inflation: It occurs when there is a rise in the prices of goods and services produced by certain sectors of the industries. India imports oil from Iran at $100 per barrel. As a result. then the unit cost of production also increases. Manufacturing and transportation costs also increase due to hike in oil prices. When the imported expensive oil reaches India. For example. the Indian consumers also have to pay more and bear the economic burden.9. a. Excess Demand Inflation is its another name. road transportation. It consequently. Fiscal Inflation: It occurs due to excess government expenditure or spending when there is a budget deficit. 10. it is known as Cost-Push (Supply-side) Inflation. who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. 15. etc. which arises due to various factors like rising income. It is the end-consumer in India.. Oil prices in the international market suddenly increase to $150 per barrel. viz. Import Price-Hike Inflation. and b. Cost-Push Inflation: When prices rise due to the growing cost of production of goods and services. the prices of end products and services being manufactured and supplied are consequently. if prices of the crude oil increase. Now India to continue its oil imports from Iran has to pay $50 more per barrel to get the same amount of crude oil. Development Inflation: During the process of the development of an economy. if the wages of workers get raised. then it will also affect all other sectors or areas (like aviation. The types of inflation based on the expectation or predictability: . and tends to raise prices of goods and services. if oil prices hike. then the Import Price-Hike Inflation also slows down. etc. causing an increase in demand and rise in prices. hiked.

when critical production factors are being fully utilized. Unanticipated Inflation: If the rate of inflation corresponds to what the majority of people are neither anticipating nor predicting. When the general price level rises. Unexpected Inflation is its another name. and imported inflation. Anticipated Inflation: If the rate of inflation corresponds to what the majority of people are either expecting or predicting. that is. What is Deflation ? .PULL INFLATION: In this type of inflation prices increase results from an excess of demand over supply for the economy as a whole. there are three factors that could contribute to Cost-Push inflation: rising wages. inflation results in loss of value of money. (b) COST . then is called Anticipated Inflation. Expected Inflation is its another name. then is called Unanticipated Inflation. Demand inflation occurs when supply cannot expand any more to meet demand.PUSH INFLATION: This type of inflation occurs when general price levels rise owing to rising input costs. 2. a rise in general level of prices of goods and services in a economy over a period of time. Thus. [imported raw or partly-finished goods may become expensive due to rise in international costs or as a result of depreciation of local currency. Another popular way of looking at inflation is "toomuch money chasing too few goods". each unit of currency buys fewer goods and services. What is Inflation or What is the meaning of Inflation : In economics inflation means. increases in corporate taxes. What are different types of inflation : (a) DEMAND . In general. also called Demand inflation. The last definition attributes the cause of inflation to monetary growth relative to the output / availability of goods and services in the economy.1.

when world oil prices rose dramatically. Thus. since the process often leads to a lower level of demand in the economy. This allows one to buy more goods with the same amount of money over time. a slow-down in the inflation rate (i. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt. when he said: “We now have the worst of both worlds not just inflation on the one side or stagnation on the other. either in the form of a reduction in government spending. when inflation declines to lower levels). personal spending or investment spending. who used the phrase in his speech to parliament in 1965. Deflation increases the real value of money and allows one to buy more goods with the same amount of money over time. Deflation refers to situation. The term stagflation was coined by British politician Iain Macleod. What is Hyperinflation : Hyperinflation is a situation where the price increases are too sharp. Deflation can also occur due to direct contractions in spending.” The side effects of stagflation are increase in unemployment. Deflation can occur owing to reduction in the supply of money or credit.e. Deflation In economics. What is Stagflation : Stagflation refers to economic condition where economic growth is very slow or stagnant and prices are rising. which is not supported by growth in Gross Domestic Product (GDP). This should not be confused with disinflation. and may aggravate recessions and lead to a deflationary spiral. At international level. We have a sort of ‘stagflation’ situation.[3] . deflation occurs when the inflation rate falls below 0% (or it is negative inflation rate).Deflation is the opposite of inflation. Hyperinflation often occurs when there is a large increase in the money supply. Deflation has often had the side effect of increasing unemployment in an economy. fuelling sharp inflation in developed countries. deflation increases the real value of money — the currency of a national or regional economy.[1] Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). it results into sharp increase in prices and depreciation of the domestic currency. conversely.accompanied by a rise in prices. Such a situation results in an imbalance in the supply and demand for the money.[2]Inflation reduces the real value of money over time. this happened during mid 1970s. Stagflation occurs when the economy isn't growing but prices are going up. or inflation. where there is decline in general price levels. deflation is a decrease in the general price level of goods and services. In this this remains unchecked..

this should not be confused with deflation as a defined term. . a more accurate description for a decrease in the value of a capital asset is economic depreciation (which should not be confused with theaccounting convention of depreciation.Although the values of capital assets are often casually said to "deflate" when they decline. which are standards to determine a decrease in values of capital assets when market values are not readily available or practical).