1. What is Inflation: Five Types of Inflation Defined
Inflation is a situation of sustained and inordinate increase in the prices of goods and services.
When there is a rise in general price level for all goods and services it is known as inflation. An inflationary situation could be because of the rise in any single price or a group of prices of related goods and services.
Types of Inflation
There are no less than five different types of inflation:
• Commodity inflation, better known as cost-push inflation
• Wage inflation, otherwise known as demand-pull inflation
• Monetary inflation,
• Fiscal inflation, and
• Foreign exchange inflation.
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This type of inflation occurs when the business houses and industries decide to increase the prices of their respective goods and services to increase their profit margins. Pricing power inflation does not occur at the time of financial crises and economic depression or when there is a downturn in the economy. This type of inflation is also called oligopolistic inflation because oligopolies have the power of pricing their goods and services at whatever levels they want.
Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a country's monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rates touched approximately 322 percent per month with October being the month of highest inflation.
2. Why Does Inflation Occur
When there is a rise in general price level for all goods and services, it is known as inflation. An inflationary movement could be because of the rise in any single price or a group of prices of related goods and services.
In simple words, you could say inflation occurs when the total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called inflation.
Why does Inflation Occur?
However, there is no one cause as to why inflation occurs. Some reasons for the occurrence of inflation are listed below.
• If the cost of production of goods and services increases, the price of the end product would also increase. This could lead to inflation.
• There is a possibility of inflation when the business houses and industries increase the price of their goods and services in order to increase their profit margins. This type of inflation is known as pricing power inflation or administered price inflation. In this type of inflation, the business houses have the power of pricing their respective goods and services.
• When there is an increase in the price of the goods and services produced by a certain section of an industry, inflation is likely to occur. The reason is all the industries related to that section of industry would raise the price of their goods and services. For instance, the increase in the cost of crude oil has led to increase in the airfares and the train fares.
• Fiscal inflation occurs when there is excess government spending. Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson.
• A type of inflation that occurs during or soon after a war is known as hyperinflation. Hyperinflation is short-lived and is sometimes known as galloping inflation.
• A type of inflation known as stagflation occurs when an economy faces high unemployment rate and economic stagnation.
• Whether inflation is good for an economy or not depends on the type of inflation and the causes of the...