Inflation – Meaning, Definitions, Characteristics, Causes and types

Types of Inflation

Inflation is of different types based on different categories explained below:

1. Based on degree or speed with which prices rise.

i. Creeping Inflation

It is the mildest type of inflation. The government has sometimes to resort to creeping inflation to make the economy dynamic. This type of inflation serves as a tonic for a backward and underdeveloped economies. Under this, the prices rises slowly: industry and trade receive stimulus and the country slowly and gradually develops economically. It is on account of its stimulating effect that some economists welcome it for the economic development of a backward economy. In fact, there are some economists who support creeping inflation in the form of a slow and gradual rise in prices to keep the economy away from stagnation. It has been pointed out that the price-level rises approximately by 2% annually under creeping inflation.

ii. Walking Inflation

The rate of the increase of the price- level acquires greater speed and rapidity under walking inflation. Roughly speaking, the price-level under walking inflation rises approximately by 5% annually. If proper control is not exercised over walking inflation in time, it can easily assume the form of running inflation.

iii. Running Inflation

The rate of the increase of price-level gets further accelerated under running inflation. The price-level under this type of inflation rises approximately by 10% every year. In case, the government fails to curb running inflation in time, it may easily develop into galloping inflation.

iv. Jumping or galloping or hyper-inflation

In fact, this is the most dangerous type of inflation. Under this type of inflation, the prices rise every minute and there is no upward limit to which the price-level may rise in course of time. Lord Keynes has referred to this type of inflation as the true inflation. This type of inflation invariably occurs after the point of full employment. Under this, the price level rises approximately by 16%.

2. Based on processes through which inflation is induced.

On the basis of different processes through which it is induced, inflation is of three types:

i. Deficit-induced inflation

It is caused by the adoption of deficit financing or by government spending in excess of its revenue receipts.

ii. Wage-induced inflation

It results from an increase in money wages.

iii. Profit-induced inflation

It occurs on account of an increase in the profits of the manufacturers.

iv. Currency Inflation

If rise in the price level is the result of expansion of printed money it is termed as currency inflation. This is the classic type of inflation marked type an excess supply of money in relation to the available output of goods and services.

Since the excessive supply of money is confronted with a limited supply of goods and services, it inevitably results in an inflationary rise in the price-level. This type of inflation generally occurs at a time of war.

v. Credit inflation

If rise in prices is due to expansion of bank credit, it is called as credit inflation.

Sometimes the government encourages an expansion of credit without expanding the supply of money in circulation. This is known as credit inflation. The main objectives of credit inflation are:

  • To lighten the burden of indebtedness of the farmers,
  • To expand production, and
  • To mobilize financial resources for development plans.

vi. International generated inflation

It has been frequently argued that inflation is not generated domestically, but is rather an international phenomenon beyond their control. This view of inflation seeks to attribute the price rise to international forces.

vii. Sectoral inflation

In this case, rise in prices may be restricted to a particular sector of an economy.

3. On the basis of time

This classification of inflation has been done on the basis of ‘time’.

i. Peace-time inflation

It  means the rise in the price-level during peace-time. This type of inflation is very often the result of increased governmental expenditure on ambitious developmental projects in the economy. Such an inflation very often occurs during a period of planned economic development in backward and underdeveloped economies.

ii. Wartime inflation

Wartime inflation on the contrary, arises during a period of war. Modern wars, as is well-known are total wars, necessitating huge governmental expenditure on their successful prosecution. During wartime, the increase in the output of goods and services does not keep pace with the expansion of money supply. An inflationary gap inevitably emerges which results in a rising price-level.

iii. Post-war inflation

It generally takes place immediately after the cessation of hostilities when the pent-up demand finds open expression on the relaxation of price and physical controls by the government. The rise in the price-level under post-war inflation may even be more rapid than during wartime inflation.

4. On the basis of Scope

O the basis of scope inflation can be Sporadic or Comprehensive.

i. Comprehensive Inflation

When the prices of all commodities rise in the entire economy, it is known as Comprehensive Inflation. Another name for comprehensive inflation is economy-wide inflation.

ii. Sporadic Inflation

Sporadic inflation, on the other hand, is sectoral inflation. Under this type of inflation, the prices of all the commodities do not register a rise. Only the prices of a few commodities show an upward trend. The prices of a few commodities may rise upwards on account of certain physical bottlenecks which may impede any attempt to increase their production. For example, the prices of good grains may show an upward rise on account, of the failure of crops, consequent upon the failure of rains.

5. On the basis of Government Action

Inflation can also be classified into open and repressed inflations according to the government’s reaction to the presence of inflationary pressures in the economy.

i. Open inflation

An inflation is said to be open when the government takes no steps to check the rise in the price-level. Open inflation is allowed to continue unchecked without any attempt on the part of the government. Under open inflation, market mechanism performs the function of allocating scarce resources among competing industries.

If there is shortage of any particular resource, the market mechanism would raise its price and allocate it to those industries which can afford to pay a higher price for it. The hyper-inflation in Germany after the World War I is an example of open inflation.

 ii. Supressed Inflation

If the government actively makes efforts to check the price rise through price control and rationing, it is called suppressed inflation. These measures can check inflation as long as their effect continues. Once these measures are withdrawn, the demand for goods increases and the suppressed inflation becomes open inflation.

Thus, suppressed inflation means to defer current demand or to divert demand from controlled goods to uncontrolled goods. Suppressed inflation results in many evils, such as profiteering, black marketing, hoarding, corruption, etc. It also leads to the diversion of economic resources from more essential goods to less essential goods.

6. On the basis of employment level

Prof. Pigou has classified inflation into,

i. Partial inflation.

According to Prof. Pigou, the price- level consequent upon the expansion of money supply in the pre-full employment stage is referred to as partial inflation. There is only a slight increase in the price-level under partial inflation. The increase in the supply of money goes to mobilise the idle resources in the economy. This results in an increase in the volume of employment in the economy. Thus, the increase in the supply of money before the point of full employment goes to increase the volume of output and employment rather than the price-level.

ii. Full inflation

The increase in the supply of money after the point of full employment does not increase output and employment (because there already exists full employment of resources in the economy), but leads to a sharp uninterrupted rise in the price-level. Such a situation is referred to as the situation of full inflation.

 

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Inflation – Meaning, Definitions, Characteristics, Causes and types

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