In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. It is, often, one of the most unwanted and misunderstood of economic phenomena. We tend to believe that the prices of commodities will, over time, rise and fall, responding to the pulls and pushes of demand and supply. An unexpected decrease in the production of a commodity will lead to increase in the price of that commodity, just as an unexpected increase in the production will cause the prices to fall (cost push). Another reason for the price fluctuations can be attributed to an unexpected increase/decrease in the demand of commodities (demand ...view middle of the document...
Most of these contributions have come from Europe and the United States which in itself is not a matter of concern but at the same time, the context matters in shaping our focus of attention. In economics there are peculiarities that are specific to different regions and for nations at different stages of development. It is therefore important to do fundamental analytical research on inflation where the backdrop is an emerging market economy such as India.
Types of Inflation
There are many types of inflation.
It can be classified on the basis of the following:
A- On the basis of the degree of government control:
1. Open inflation:
Situation in which no steps are taken to control rising prices.
According to Milton,
“it is a process in which prices are allowed to rise without any attempt on part of government to control them. Under open inflation goods are distributed through price mechanism. Price mechanism is a situation in which, those people who have large money to spend, buy more goods.”
2. Suppressed inflation:
Situation in which rising prices are controlled through measures taken by the government.
According to FRIEDMAN,
“Suppressed inflation is more dangerous than open inflation because of the corrupt officials responsible for administrating price control; black market raises its ugly head”.
B- On the basis of political conditions:
1. War time inflation-
In order to meet the war expenses government increases the supply of money. Large proportion of the production is bought by government itself. Relatively small proportion is left to the general public.
2. Peace time inflation-
Underdeveloped countries need large resources for economic planning. In order to mobilize resources, government has to resort deficit financing .It leads to inflation which is known as peace time inflation.
C- On the basis of the scope:
1. Sectoral inflation- When inflation affects only a particular part of the country or covers only one or two goods like pulses, petrol etc, it is called sectoral inflation.
2. Comprehensive inflation- When inflation is not confined to a given part of the country or a few goods, but comprises the entire country and all goods, it is called comprehensive inflation
D- Some other general types of inflation are:
1. Creeping inflation:
In this inflation prices rise very slowly.
Such inflation is not only considered beneficial to the economy but is also considered essential to some extent.
Some economists are of the view that 3% rise in prices can be called creeping inflation.
Appropriate and desirable in the interest of national development.
2. Running inflation:
When there is rapid increase in prices in very short period of time it is called running inflation .In this case rate of inflation is between 80 and 100% over a decade. Such an inflation has adverse effect on poor and middle sections of the society.
High output growth and low inflation are among...