Meaning & Types of Inflation

One of the most often used words in economics is inflation; nevertheless, what exactly does it mean and how does it influence our daily lives as well as national economies? Whether you're making long-term investments, conserving money, or grocery shopping, inflation is quite important.

Simply said, inflation is the process by which the general cost of goods and services increases over time, therefore reducing the purchasing value of money. Still, inflation is not a one-size-fits-all notion. Depending on their causes, degree, and speed, economists classify inflation into several forms. This blog clarifies the meaning of inflation and its several forms, therefore strengthening your basis on the subject.

 

What is Inflation?

In an economy, inflation is the rate of change in the cost of goods and services across a given period of time. It shows a decline in the value of a country's currency, therefore reflecting its purchasing power.

For instance, something costing ₹100 today will cost ₹105 a year from now if the inflation rate is 5%. Consequently, the same amount of money purchases less products and services over time, which is obviously evidence of inflation.

Inflation is measured using indices like:

• Consumer Price Index (CPI)
• Wholesale Price Index (WPI)

 

1. Types of Inflation: Based on Cause 

Though complicated, inflation is a fundamental idea that helps one to grasp the dynamics of economies. From the cost of groceries to the value of your money, its several manifestations impact every element of life, from gradual inflation that signals good growth to hyperinflation that may wipe out an economy.

Pulling demand inflation

When overall demand in an economy rises above overall supply, this kind of inflation results. Often defined as "too much money chasing too few goods".

For example, demand for electronics skyrocketing over a festive season while supply stays the same drives up prices.

Inflation driven by cost-push

Rising production costs drive cost-push inflation, which causes companies to hike prices in order to keep their profit margins.

For example, a jump in crude oil prices raises manufacturing and transportation expenses, therefore affecting the end items price.

Integrated Inflation

Usually referred to as pay-price inflation, this kind of inflation results from workers seeking better pay because of growing living expenses. Then companies hike rates to pay for higher labor expenses, setting off a pay-price spiral.

 

2. Types of Inflation: Based on Rate or Speed

Understanding the definition and forms of inflation helps you with anything from establishing a career in finance to preparing for a commerce test to simply improving your own budget.

Mild or crawling inflation

Usually falling under 3% annually, this is mild and predictable inflation. It is thought natural and occasionally even helpful for economic development.

Walking Inflation

3% to 10% annual inflation. Since it lowers consumers' buying power, it starts to worry legislators.

Galloping Inflation

Usually exceeding 10% to 20%, this is known as "running inflation" and results from very high inflation that is accelerating. It breeds financial unrest.

Hyperinflation

Often topping 50% per month, this is shockingly high and unpredictable inflation. Usually it results from political unrest or financial catastrophe.

For instance, late 2000s Zimbabwe went through hyperinflation when prices doubled every few hours.

 

3. Types of Inflation: Based on Control

Open Inflation

This kind of situation results from open market pricing increases free from government meddling.

Restrained Inflation

Although there is inflationary pressure here, government rationing rules and price control programs stop real price increases. 

Effects of Inflation

• Inflation erodes purchasing power, therefore influencing customers' capacity to buy products.
• People often spend more than they save in expectation of growing prices.
• Usually in order to lower inflation, central banks hike interest rates.
• Price hikes mostly affect retirees and wage earners in fixed-income groups.
• Debtors pay back loans with money having diminished purchasing power.

 

Did you know? Germany suffered hyperinflation so severe in 1923 that people required wheelbarrows loaded with money simply to purchase a loaf of bread. Prices were increasing every few days at its height, and since money had lost all value, families used it as toys or wallpaper for their children.

 

Read More 

• Deficit Financing
• Financing Decisions 
• Occupational Structure 
• Diminishing Balance Method

 

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Frequently Asked Questions (FAQs)

Is it always harmful for economic inflation?

Not always. A modest inflation can point to a developing economy. It gets troubling when it is too low (deflation) or too high (galloping or hyperinflation).

At what perfect rate should inflation be?

For a developing nation, most central banks and economists agree that a 2– 4% annual inflation rate is healthy.

Who manages Indian inflation?

Through mechanisms including repo rate, reverse repo rate, and CRR, the Reserve Bank of India (RBI) is in charge of lowering inflation via monetary policy.