INFLATION

Inflation means the condition of a substantial and rapid increase in

the general price level which causes a decline in the purchasing
power of money. Inflation is statistically measured in terms of
percentage increase in the price index per unit of time. There is no
generally accepted definition of inflation and different economists
define it differently.

Crowther, “Inflation is a ‘state’ which the value of money is falling

i.e. the prices are rising”.

Friedman, “Inflation is always and everywhere a monetary

phenomenon”.

Keynes, “Inflation is the result of the excess of aggregate demand

over the available aggregate supply and true inflation starts only
after full employment”.

 Features of Inflation:

(1) Inflation is always accompanied by a rise in the price level.

(2)Inflation is a monetary phenomenon and it is generally caused by
excessive money supply.
(3)Inflation is a dynamic process as observed over the long period.
(4)A cyclical movement of prices is not inflation.
(5)Pure inflation starts after full employment.
(6)Inflation may be demand pull or cost push.
KINDS OF INFLATION:-

1) According to Rate of Rise in Price

i) Creeping inflation: When the rise in prices is very slow like that of a
snail or creeper, it called creeping inflation. In terms of speed, a
sustained rise in prices of annual increase of less than 3 percent per
annum is characterized as creeping inflation. Such an increase in
prices is regarded safe and essential for economic growth.

ii) Walking inflation : When the rise in prices becomes more

pronounced as compared to a creeping inflation, there exists walking
inflation in the economy. Roughly, when prices rise by more than ten
percent and within a range of 30 percent to 40 percent over a
decade, or 3 to 4 percent a year, walking inflation is the outcome.
Walking inflation presents a warning signal for the occurrence of
running and galloping inflation.

iii) Running inflation: When the movement of price accelerates

rapidly, running inflation emerges. Running inflation may record
more than 100 percent rise in prices over a decade. Thus, when
prices rise by more than 10 percent a year, running inflation occurs.

iv) Galloping inflation: In the case of hyperinflation, prices rise every

moment, and there is no limit to the height to which prices might
rise; therefore, it is difficult to measure its magnitude, as prices rise
by fits and starts. If, within a year, the prices rise by 100 percent, it is
a case of hyperinflation or galloping inflation.

2. According to the factors influences money supply and demand

for goods and services.

i) Excessive money supply inflation: This is classical types of inflation ,

where there is an excess of money supply in relation to the
availability of real goods and service. This type of inflation is usually
conceived with reference to the cyclical fluctuations in the economy,
and measures of monetary control to check inflationary of
deflationary trends.

ii) Cost inflation: When inflation emerges on account of a rise in

factor cost, it is called cost inflation. It occurs when money incomes
(wage rate, particularly) expand more than real productivity. Cost
inflation has its course through the level of money costs of the
factors of production and in particular through the level of wage
rates. Due to a rising cost of living index, workers demand higher
wages, and higher wages in their turn increase the cost of
production, which a producer generally meets by raising prices.

iii) Deficit inflation: When the government budgets contain heavy

deficit financing, through creating new money, the purchasing power
in the community increases and prices rise. This may be referred to
as deficit-induced inflation.

3. War, post-war and peace-time inflation

i) War-time inflation: It is the outcome of certain exigencies of war,

on account of increased government expenditure, which is of an
unproductive nature. By such public expenditure, the government
apportions a substantial production of goods and services out of
total availability for war which causes a downward shift in the
supply; as a result, an inflationary gap may develop.

ii) Post–war inflation : It is a legacy of war. In the immediate post-war

period it is usually experienced. This may happen when the
disposable income of the community increases when war-time
taxation is withdrawn or public debt is repaid in the post-war period.

iii) Peace time inflation : By this is meant the rise in prices during the
normal period of peace. Peace-time inflation is often a result of
increased government outlays on capital projects having a long
gestation period; so a gap between money income and real wage
develops.