Inflation refers to the general increase in prices of goods and services in an economy over time, leading to a decrease in the purchasing power of money. There are different types of inflation, and here are six of them, along with brief explanations:
- Demand-Pull Inflation: This type of inflation occurs when the aggregate demand for goods and services in an economy exceeds the available supply. As demand increases, producers may respond by raising prices to capitalize on the excess demand. Factors contributing to demand-pull inflation include strong consumer spending, government spending, and increased investments.
- Cost-Push Inflation: Cost-push inflation is caused by rising production costs, such as an increase in wages, raw material prices, or energy costs. When businesses face higher expenses, they often pass those costs onto consumers in the form of higher prices. Cost-push inflation can lead to a decrease in production and economic growth if businesses struggle to maintain profitability.
- Built-In Inflation: Also known as wage-price inflation, built-in inflation occurs when there is a continuous cycle of increasing wages and prices. When workers demand higher wages to keep up with rising living costs, businesses respond by raising prices to cover the increased labour expenses. This, in turn, leads to a higher cost of living, prompting workers to demand even higher wages, perpetuating the inflationary cycle.
- Hyperinflation: Hyperinflation is an extremely high and typically accelerating rate of inflation, often exceeding 50% per month. It occurs when confidence in a country’s currency collapses, leading to a rapid loss of its purchasing power. Hyperinflation can result from factors like excessive money printing by the central bank, loss of confidence in the government’s ability to manage the economy, and political instability.
- Structural Inflation: Structural inflation is caused by long-term imbalances in an economy’s structure and is often related to supply-side issues. These imbalances can include inadequate infrastructure, labour market inefficiencies, or natural resource constraints, leading to persistent upward pressure on prices.
- Moderate Inflation: Moderate inflation is a controlled and relatively stable increase in prices, usually within a single-digit percentage range on an annual basis. Many central banks and governments target a low to moderate level of inflation as it is believed to be conducive to a healthy economy. Mild inflation encourages spending and investment, while deflation (negative inflation) can lead to economic stagnation.
It’s important to note that some of these types of inflation can coexist or overlap in an economy at different times. Central banks and policymakers often strive to maintain a balance to ensure price stability and sustainable economic growth.
DEFINITION OF INFLATION
Inflation occurs when the volume of purchases is permanently running ahead of production, with too much money in circulation chasing too few goods.
TYPES OF INFLATION
There are four main types of inflation. These are Demand-pull inflation: Demand-pull inflation occurs when consumers have high purchasing power, leading to increases in aggregate demand without a corresponding increase in supply. In other words, this type of inflation occurs when the demand for goods and services is greater than its supply. The factors responsible for this type of inflation may be due to population increase; increase in workers’ salaries and wages.
- Cost-push inflation: Cost-push inflation occurs when increases in the cost of production are passed on to consumer in the form of high prices of goods and services pushed up by rising costs.
Hyperinflation: Hyperinflation, also known as galloping or run-away inflation, occurs when persistent inflation becomes uncontrollable and the value of money keeps declining rapidly. Prices of goods and services rise at a fast rate, leading to money losing its value or its ability to buy goods. War, budget deficits, etc are the major causes of hyperinflation.
Persistent or creeping types of inflation: Persistent or creeping inflation, also known as chronic inflation, occurs when there is a slow but steady rise in the volume of purchasing power and a fall in the supply of goods and services. In other words, when inflation involves a slow but steady rise in the general prices of goods and services, it is known as creeping inflation.