What is meant by Inflation? Discuss its types
What Is Inflation And Its Various Types
To the neo-classical and their followers at the University of Chicago, inflation is fundamentally a monetary phenomenon. In the words of Friedman, “Inflation is always and everywhere a monetary phenomenon…and can be produced only by a more rapid increase in the quantity of money than output.” But economists do not agree that money supply alone is the cause of inflation.
As pointed out by Hicks, “Our present troubles are not of a monetary character.” Economists, therefore, define inflation in terms of a continuous rise in prices Johnson defines “inflation as a sustained rise” in prices. Brooman defines it as “a continuing increase in the general price level.”” Shapiro also defines inflation in a similar vein “as a persistent and appreciable rise in the general level of prices.” Demberg and McDougall are more explicit when they write that “the term usually refers to a continuing rise in prices as measured by an index such as the consumer price index (CPI) or by the implicit price deflator for gross national product.”
However, it is essential to understand that a sustained rise in prices may be of various magnitudes. Accordingly, different names have been given to inflation depending upon the rate of rise in prices.
Types of inflation
1. Creeping Inflation: When the rise in prices is very slow like that of a snail or creeper, it is called creeping inflation. In terms of speed, a sustained rise in prices of annual increase of less than 3 per cent per annum is characterised as creeping inflation. Such an increase in prices is regarded safe and essential for economic growth.
2. Walking or Trotting Inflation : When prices rise moderately and the annual inflation rate is a single digit. In other words, the rate of rise in prices is in the intermediate range of 3 to 6 per cent per annum or less than 10 per cent. inflation at this rate is a warning signal for the government to control it before it turns into running inflation.
3. Running Inflation: When prices rise rapidly like the running of a horse at a rate or speed of 10 to 20 per cent per annum, it is called running inflation. Such an inflation affects the poor and middle classes adversely. Its control requires strong monetary and fiscal measures, otherwise it leads to hyperinflation.
4. Hyperinflation: When prices rise very fast at double or triple digit rates from more than 20 to 100 per cent per annum or more, it is usually called runaway ox galloping inflation. It is also characterised as hyperinflation by certain economists. In reality, hyperinflation is a situation when the rate of inflation becomes immeasurable and absolutely uncontrollable. Prices rise many times every day. Such a situation brings a total collapse of monetary system because of the continuous fall in the purchasing power of money.
5. Semi-Inflation: According to Keynes, so long as there are unemployed resources, the general price level will not rise as output increases. But a large increase in aggregate expenditure will face shortages of supplies of some factors which may not be substitutable. This may lead to increase in costs and prices start rising. This is known as semi-inflation or bottleneck inflation because of the bottlenecks in supplies of some factors.
6. True Inflation: According to Keynes, when the economy reaches the level of full employment any increase aggregate expenditure will raise the price level in the same proportion. This is because it is not possible to increase the supply of factors of production and hence of output after the level of full employment. This is called true inflation.
7. Open Inflation: Inflation is open when “markets for goods or factors of production are allowed to function freely, setting prices of goods and factors without normal interference by the authorities. Thus open inflation is the result of the uninterrupted operation of the market mechanism. There are no checks or controls on the distribution of commodities by the government. Increase in demand and shortage of supplies persist which tend to lead to open inflation. Unchecked open inflation ultimately leads to hyperinflation.
8. Suppressed : Men the government imposes physical and monetary controls to check open inflation, it is known as repressed or suppressed inflation. The market mechanism is not allowed to function normally by the use of licensing, price controls and rationing in order to suppress extensive rise in prices.
10. Mark-up Inflation: The concept of mark-up inflation is closely related to the price-push problem. Modem labour organisations possess substantial monopoly power. They, therefore, set prices and wages on the basis of mark-up over costs and relative incomes. Firms possessing monopoly power have control over the prices charged them. So they have administered prices which increase their profit margin. This sets off an inflationary rise in prices. Similarly, when strong trade unions are successful in raising the wages of workers, this contributes to inflation.
11. Ratchet Inflation: A ratchet is a toothed wheel provided with a catch that prevents the ratchet wheel from moving backward. The same is the case under ratchet inflation when despite downward pressures in the economy, prices do not fall. In an economy having price, wage and cost inflations, aggregate demand falls below full employment level due to the deficiency of demand in some sectors of the economy. But wage, cost and price structures are inflexible downward because large business firms and labour organisations possess monopoly power. Consequently, the fall in demand may not lower prices significantly. In such a situation, prices will have an upward ratchet effect, and this is known as “ratchet inflation.”
12. Sectoral Inflation: Sectoral inflation arises initially out of excess demand in particular industries. But it leads to a general price rise because prices do not fall in the deficient demand sectors.
13. Reflation : Is a situation when prices are raised deliberately in order to encourage economic activity. When there is depression and prices fall abnormally low, the monetary authority adopts measures to put more money in circulation so that prices rise. This is called reflation.
