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

inflation only. The reason is that by raising interest rates when stock prices or real estate prices
rise, and lowering them when these asset prices fall, central banks might be more successful in
avoidingbubbles and crashes in asset prices.[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, or government spending and taxation,
as ineffective in controlling inflation.[57] The monetarist economist Milton Friedman famously
stated, "Inflation is always and everywhere a monetary phenomenon." [58]
Monetarists assert that the empirical study of monetary history shows that inflation has always
been a monetary phenomenon. The quantity theory of money, simply stated, says that any change
in the amount of money in a system will change the price level. This theory begins with
the equation of exchange:

where
is the nominal quantity of money.
is the velocity of money in final expenditures;
is the general price level;
is an index of the real value of final expenditures;
In this formula, the general price level is related to the level of real economic
activity (Q), the quantity of money (M) and the velocity of money (V). 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).
Monetarists assume that the velocity of money is unaffected by monetary policy
(at least in the long run), and the real value of output is determined in the long
run by the productive capacity of the economy. Under these assumptions, the
primary driver of the change in the general price level is changes in the quantity
of money. With exogenous velocity (that is, velocity being determined externally
and not being influenced by monetary policy), the money supply determines the
value of nominal output (which equals final expenditure) in the short run. In
practice, velocity is not exogenous in the short run, and so the formula does not
necessarily imply a stable short-run relationship between the money supply and
nominal output. However, in the long run, changes in velocity are assumed to be
determined by the evolution of the payments mechanism. If velocity is relatively
unaffected by monetary policy, 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

exogenous long-run rate of velocity growth minus the long run growth rate of
real output.[10]
Keynesian view
Keynesian economics proposes that changes in money supply do not directly affect prices, and that
visible inflation is the result of pressures in the economy expressing themselves in prices.
There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle
model":[52]

Demand-pull inflation is caused by increases in aggregate demand due to increased private

and government spending, etc. Demand inflation encourages economic growth since the excess
demand and favourable market conditions will stimulate investment and expansion.

Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate
supply (potential output). This may be due to natural disasters, or increased prices of inputs.
For example, a sudden decrease in the supply of oil, leading to increased oil prices, 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. Another example stems from unexpectedly high
Insured losses, either legitimate (catastrophes) or fraudulent (which might be particularly
prevalent in times of recession).[citation needed]

Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage
spiral". It involves workers trying to keep their wages up with prices (above the rate of
inflation), and firms passing these higher labor costs on to their customers as higher prices,
leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen
as hangover inflation.
Demand-pull theory states that inflation accelerates when aggregate demand increases beyond the
ability of the economy to produce (its potential output). Hence, any factor that increases aggregate
demand can cause inflation.[53] However, in the long run, 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. Another (although much less common) cause can be a rapid decline in
the demand for money, as happened in Europe during the Black Death, or in the Japanese occupied
territories just before the defeat of Japan in 1945.

Causes of Inflation
Inflation means there is a sustained increase in the price level. The main causes of inflation are
either excess aggregate demand (economic growth too fast) or cost push factors (supply side
factors)

1. 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. As firms reach full capacity, they respond by putting up prices, leading to inflation.
Also, near full employment, workers can get higher wages which increases their spending power.

AD can increase due to an increase in any of its components C+I+G+X-M

We tend to get demand pull inflation, if economic growth is above the long run trend rate of
growth. The long run trend rate of economic growth is the average sustainable rate of growth and is
determined by the growth in productivity.

Cost push inflation can be caused by many factors

1. Rising wages
If trades unions can present a common front then they can bargain for higher wages. Rising wages
are a key cause of cost push inflation because wages are the most significant cost for many firms.
(higher wages may also contribute to rising demand)
2. Import prices
One third of all goods are imported in the UK. If there is a devaluation then import prices will
become more expensive leading to an increase in inflation. A devaluation / depreciation means the
Pound is worth less, therefore we have to pay more to buy the same imported goods.

3. Raw Material Prices

The best example is the price of oil, 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. E.g. in early 2008,
there was a spike in the price of oil to over $150 causing a temporary rise in inflation.
4.

Profit Push Inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during
strong economic growth.
5. Declining productivity
If firms become less productive and allow costs to rise, this invariably leads to higher prices.
6. Higher taxes
If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and
therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is
even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases.

What else could cause inflation?

Rising house prices
Rising house prices do not directly cause inflation, but they can cause a positive wealth effect and
encourage consumer led economic growth. This can indirectly cause demand pull inflation
Printing more money
If the Central Bank prints more money, you would expect to see a rise in inflation. This is because
the money supply plays an important role in determining prices. If there is more money chasing the
same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme
increase in the money supply
However, in exceptional circumstances such as liquidity trap / recession, it is possible to increase
the money supply without causing inflation. This is because in recession, an increase in the money
supply may just be saved, e.g. banks dont increase lending but just keep more bank reserves.
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, for example the decisions of utility
businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing
strategies of the food retailers based on the strength of demand and competitive pressure in their
markets.
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.
Inflation can also come from external sources, for example a sustained rise in the price of crude oil
or other imported commodities, foodstuffs and beverages.
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

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, 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. A depreciation of the exchange rate increases the price of imports and reduces the foreign
price of a country's exports. If consumers buy fewer imports, while exports grow, AD in will
rise and there may be a multiplier effect on the level of demand and output
2. Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher
government spending. If direct taxes are reduced, consumers have more disposable income
causing demand to rise. Higher government spending and increased borrowing creates extra
demand in the circular flow
3. 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.
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.
4. Fast growth in other countries providing a boost to UK exports overseas. 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, by increasing prices to protect
their profit margins.
There are many reasons why costs might rise:
1. Component costs: e.g. an increase in the prices of raw materials and other components.
This might be because of a rise in commodity prices such as oil, copper and agricultural
products used in food processing. A recent example has been a surge in the world price of
wheat.
2. Rising labour costs - caused by wage increases, which are greater than improvements in
productivity. Wage costs often rise when unemployment is low because skilled workers
become scarce and this can drive pay levels higher. Wages might increase when
people expect higher inflation so they ask for more pay in order to protect their real
incomes. Trade unions may use their bargaining power to bid for and achieve increasing
wages, this could be a cause of cost-push inflation
3. Expectations of inflation are important in shaping what actually happens to inflation.
When people see prices are rising for everyday items they get concerned about the effects of
inflation on their real standard of living. One of the dangers of a pick-up in inflation is what
the Bank of England calls second-round effects" i.e. an initial rise in prices triggers a burst
of higher pay claims as workers look to protect their way of life. This is also known as a
wage-price effect"

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

14. 2. Demand-pull Inflation:

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

17.

18. 3. Monetary Inflation:

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

The list is as follows:

1.
a.
b.

Coverage or scope:
Comprehensive or Economy-Wide Inflation, and
Sporadic Inflation.

2.
a.
b.
c.
3.
a.
b.
4.
a.
b.
c.
d.
e.
f.
g.
5.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
i.
ii.
m.
n.
o.
p.
q.
6.
a.
b.

Time of occurrence:
War-Time Inflation,
Post-War Inflation, and
Peace-Time Inflation.
Government's reaction or control:
Open Inflation, and
Suppressed or Repressed Inflation.
Rising prices:
Creeping, Mild or Low Inflation,
Chronic or Secular Inflation,
Walking or Trotting Inflation,
Moderate Inflation,
Running Inflation,
Galloping or Jumping Inflation, and
Hyperinflation.
Different causes:
Deficit Inflation,
Credit Inflation,
Scarcity Inflation,
Profit Inflation,
Pricing Power, Administered Price or Oligopolistic Inflation,
Tax Inflation,
Wage Inflation,
Build-In Inflation,
Development Inflation,
Fiscal Inflation,
Population Inflation,
Foreign Trade Induced Inflation:
Export-Boom Inflation, and
Import Price-Hike Inflation.
Export-Boom Inflation,
Import Price-Hike Inflation,
Sectoral Inflation,
Demand-Pull or Excess Demand Inflation, and
Cost-Push (Supply-side) Inflation.
Expectation or predictability:
Anticipated or Expected Inflation, and
Unanticipated or Unexpected Inflation.

Now let's discuss each type of inflation one by one.

The types of inflation based on coverage or scope:

1.

Comprehensive Inflation: When the prices of all commodities rise in the entire economy, it
is known as Comprehensive Inflation. Economy-Wide Inflation is its another name.
2.
Sporadic Inflation: Time when prices of only a few commodities in some regions (areas)
rise, it is called Sporadic Inflation. It is sectional in nature. For example, increase in food prices
due to bad monsoon (winds that bring seasonal rains in India).
The types of inflation based on the time or period of occurrence:

Image credits Gaurav Akrani.

1.

War-Time Inflation: Inflation that takes place during the period of a warlike situation is
Wartime Inflation. During war, 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

from people. Consequently, prices of necessary goods keep on rising in the market, resulting in
Wartime Inflation.
2.
Post-War Inflation: Inflation that takes place soon after a war is a Post-War Inflation. After
the war, government controls are relaxed, resulting in a faster hike in prices than what
experienced during the war.
3.
Peace-Time Inflation: When prices rise during the peace period, it is known as Peacetime
Inflation. It is due to enormous government expenditure or spending on capital projects of a long
gestation (development) time.
The types of inflation based on the government's reaction or its degree of control:

1.

Open Inflation: When government does not attempt to restrict inflation, it is known as an
Open Inflation. In a free-market economy, where prices are allowed to take its course, Open
Inflation occurs.
2.
Suppressed Inflation: When government prevents the price rise through price controls,
rationing, etc., it is known as Suppressed Inflation. Repressed Inflation is its another name.
However, when government removes its controls, it becomes Open Inflation. It then leads to
corruption, black marketing, artificial scarcity, etc.
The types of inflation based on the rising prices:

1.

2.

3.

4.
5.

6.

7.

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

quantitative terms, when prices rise above 1000% per annum (quadruple or four-digit inflation
rate), it is termed as Hyperinflation. During a worst-case scenario of hyperinflation, the value of
the national currency (money) of an affected country reduces almost to zero. Paper money
becomes worthless, and people start trading either in gold and silver or sometimes even use the
old barter system of commerce. 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.
Following is a conceptual graph on Creeping, Walking, Running, Galloping, Hyperinflation, and
Moderate Inflation.

In the above figure,

1.
2.
3.
4.
5.
6.
7.
8.

X-axis represents the time in years or annum.

Y-axis implies percentage (%) increase or rise in price.
OA is a Creeping Inflation from 0 to 3%.
AB is a Walking Inflation from 3 to 10%.
BC is a Running Inflation from 10 to 20%.
CD is a Galloping Inflation from 20 to 1000%.
DE is a Hyperinflation from 1000% and above.
OB is an addition of OA and AB. It is a Moderate Inflation.

Note: Graph is not drawn to scale. It is roughly made only to get an understanding of how the
actual figure will appear if plotted to scale.

The types of inflation based on different or miscellaneous causes:

1.
2.
3.

4.
5.

6.
7.
8.

Deficit Inflation takes place due to deficit financing.

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

9.

Development Inflation: During the process of the development of an economy, income

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

1.

Anticipated Inflation: If the rate of inflation corresponds to what the majority of people are
either expecting or predicting, then is called Anticipated Inflation. Expected Inflation is its
another name.
2.
Unanticipated Inflation: If the rate of inflation corresponds to what the majority of people
are neither anticipating nor predicting, then is called Unanticipated Inflation. Unexpected
Inflation is its another name.

What is Inflation or What is the meaning of Inflation :

In economics inflation means, a rise in general level of prices of goods and services in a economy
over a period of time. When the general price level rises, each unit of currency buys fewer goods
and services. Thus, inflation results in loss of value of money. Another popular way of looking at
inflation is "toomuch money chasing too few goods". The last definition attributes the cause of
inflation to monetary growth relative to the output / availability of goods and services in the
economy.

What are different types of inflation :

(a) DEMAND - PULL INFLATION: In this type of inflation prices increase results from an
excess of demand over supply for the economy as a whole. Demand inflation occurs when supply
cannot expand any more to meet demand; that is, when critical production factors are being fully
utilized, also called Demand inflation.

(b) COST - PUSH INFLATION: This type of inflation occurs when general price levels rise
owing to rising input costs. In general, there are three factors that could contribute to Cost-Push
inflation: rising wages, increases in corporate taxes, and imported inflation. [imported raw or
partly-finished goods may become expensive due to rise in international costs or as a result of
depreciation of local currency.

What is Deflation ?

Deflation is the opposite of inflation. Deflation refers to situation, where there is decline in
general price levels. Thus, deflation occurs when the inflation rate falls below 0% (or it is
negative inflation rate). Deflation increases the real value of money and allows one to buy more
goods with the same amount of money over time. Deflation can occur owing to reduction in the
supply of money or credit. Deflation can also occur due to direct contractions in spending, either
in the form of a reduction in government spending, personal spending or investment spending.
Deflation has often had the side effect of increasing unemployment in an economy, since the
process often leads to a lower level of demand in the economy.

What is Stagflation :
Stagflation refers to economic condition where economic growth is very slow or stagnant and
prices are rising. The term stagflation was coined by British politician Iain Macleod, who used the
phrase in his speech to parliament in 1965, when he said: We now have the worst of both worlds not just inflation on the one side or stagnation on the other. We have a sort of stagflation
situation. The side effects of stagflation are increase in unemployment- accompanied by a rise
in prices, or inflation. Stagflation occurs when the economy isn't growing but prices are going up.
At international level, this happened during mid 1970s, when world oil prices rose dramatically,
fuelling sharp inflation in developed countries.

What is Hyperinflation :
Hyperinflation is a situation where the price increases are too sharp. Hyperinflation often occurs
when there is a large increase in the money supply, which is not supported by growth in Gross
Domestic Product (GDP). Such a situation results in an imbalance in the supply and demand for
the money. In this this remains unchecked; it results into sharp increase in prices and depreciation
of the domestic currency.

Deflation
In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation
occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be
confused with disinflation, a slow-down in the inflation rate (i.e., when inflation declines to lower
levels).[2]Inflation reduces the real value of money over time; conversely, deflation increases the
real value of money the currency of a national or regional economy. This allows one to buy
more goods with the same amount of money over time.
Economists generally believe that deflation is a problem in a modern economy because it increases
the real value of debt, and may aggravate recessions and lead to a deflationary spiral.[3]

Although the values of capital assets are often casually said to "deflate" when they decline, 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, which are standards to determine a decrease in values of
capital assets when market values are not readily available or practical).