Inflation

“Inflation is an upward movement in the average level of prices. Its opposite is deflation, a
downward movement in the average level of prices. The boundary between According to
Samuleson-Nordhaus, “Inflation is a rise in the general level of prices.”

In the words of Peterson, “The word inflation in the broadest possible sense refers to any
increase in the general price-level which is sustained and non-seasonal in character.”

As per Johnson, “Inflation is an increase in the quantity of money faster than real national output
is expanding.”

Kinds of Inflation:
Inflation is usually categorized on the basis of its rate and causes. Here, we would study the
types of inflation based on its rate.

Broadly, inflation can be of three types based on its rate, which are as follows:
A. On the Basis of Causes:
(i) Currency inflation:
This type of inflation is caused by the printing of currency notes.

(ii) Credit inflation:

Being profit-making institutions, commercial banks sanction more loans and advances to the
public than what the economy needs. Such credit expansion leads to a rise in price level.

(iii) Deficit-induced inflation:

The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this
gap, the government may ask the central bank to print additional money. Since pumping of
additional money is required to meet the budget deficit, any price rise may the be called the
deficit-induced inflation.

(iv) Demand-pull inflation:

An increase in aggregate demand over the available output leads to a rise in the price level. Such
inflation is called demand-pull inflation (henceforth DPI). But why does aggregate demand rise?

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Classroom
Classical economists attribute this rise in aggregate demand to money supply. If the supply of
money in an economy exceeds the available goods and services, DPI appears. It has been
described by Coulborn as a situation of “too much money chasing too few goods.”
(v) Cost-push inflation:
Inflation in an economy may arise from the overall increase in the cost of production. This type
of inflation is known as cost-push inflation (henceforth CPI). Cost of production may rise due to
an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for wage
rise since wage rate is not completely market-determined. Higher wage means high cost of
production. Prices of commodities are thereby increased.

B. On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation:
If the speed of upward thrust in prices is slow but small then we have creeping inflation. What
speed of annual price rise is a creeping one has not been stated by the economists. To some, a
creeping or mild inflation is one when annual price rise varies between 2 p.c. and 3 p.c. If a rate
of price rise is kept at this level, it is considered to be helpful for economic development. Others
argue that if annual price rise goes slightly beyond 3 p.c. mark, still then it is considered to be of
no danger.

(ii) Walking Inflation:

(iii) Galloping and Hyperinflation:
Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is
not controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme
form of inflation when an economy gets shattered.”Inflation in the double or triple digit range of
20, 100 or 200 p.c. a year is labeled “galloping inflation”.

(a) Moderate Inflation:

Takes place when the prices of goods and services rise at a single digit rate annually. Moderate
inflation is also termed as creeping inflation. When an economy passes through moderate
inflation, the prices of goods and services increase but at moderate rate

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Classroom
However, the rate of increase in prices under this type of inflation varies from country to
country. Moderate inflation is a type of inflation that can be anticipated; therefore, individuals
hold money as a store of value.

Causes of Inflation:
Generally, inflation takes place in an economy when demand for goods and services exceeds the
supply of output. Therefore, causes of inflation have two sides, the demand side and supply side.

The various causes of inflation are as follows:

(a) Increase in demand:
Takes place due to the following factors:
i. Increase in money supply
ii. Increase in disposable income
iii. Increase in expenditure on investment and consumption goods
iv. Increase profit-making capacity of producers and retailers
v. Increase in foreign demand and exports
vi. Increase in population

Anti-Inflation Policies:
Monetary Policy

Monetary policy seeks to influence the rate of aggregate spending by varying the degree of
liquidity of various constituents of the economy including banks, firms, business houses and
households. In a recession, monetary policy raises the level of expenditure by increasing the
amount of cash and other liquid assets (e.g., short and long-term government securities) at the
disposal of the community and by making borrowing conditions easier through lower rates of
interest.

Instruments of Monetary Policy:

The instruments of monetary policy are the same as instruments of credit control at the disposal
of a central bank. These are bank rate, open market operations and changes in reserve
requirements usually referred to as quantitative credit controls. The second categories of credit
controls consists of consumer credit control, margin requirements and are known as qualitative

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Classroom
controls. The quantitative instruments are so called because they regulate the total quantity of
money and qualitative so called because they are employed to limit the amount of money
available for certain specific purposes.

Until recently quantitative instruments of monetary policy were used for causing changes in the
whole structure of interest rates, for it was thought that changes in interest rates would affect the
amount of saving and investment.

Instruments of Fiscal Policy

A. Budget:
The budget of a nation is a useful instrument to assess the fluctuations in an economy.

B. Taxation:
Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly
affect the changes in disposable income, consumption and investment. An anti- depression tax
policy increases disposable income of the individual, promotes consumption and investment.
Obviously, there will be more funds with the people for consumption and investment purposes at
the time of tax reduction.

C. Public Expenditure:

The active participation of the government in economic activity has brought public spending to
the front line among the fiscal tools. The appropriate variation in public expenditure can have
more direct effect upon the level of economic activity than even taxes. The increased public
spending will have a multiple effect upon income, output and employment exactly in the same
way as increased investment has its effect on them. Similarly, a reduction in public spending, can
reduce the level of economic activity through the reverse operation of the government
expenditure multiplier.

E. Public Debt:
Public debt is a sound fiscal weapon to fight against inflation and deflation. It brings about
economic stability and full employment in an economy.

Deven Sharma
Classroom