Inflation
Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index (CPI). The word persistent is of great importance in your understanding of the concept. A single increase in prices is not called inflation. When inflation occurs, there is a sustained increase in the price level. It is also very important not to confuse inflation with an increase in the price of a particular good or service. Inflation in the long and short run is largely dependent upon the demand and supply pressures in the economy however in the long run inflation is caused by an increase in the money supply. According to the economist there are several Types of Inflation. However, I have discussed some of the common types of inflation which are as follows.
Type of Inflation
Demand-Pull inflation This type of inflation refers to that the economy actually demands more good and services than actually available. When the demand of a commodity is higher than its supply, it is obvious that its prices will rise which will make the commodity more expensive. The prices in this type will keep on rising until equilibrium is put in place between demand and supply. This is one of the most common types of inflation which has been prevailing in economy since years. Now we are showing a demand pull inflation with the help of diagram.
Cost-Push Inflation
This is another major type of inflation. When there is an increase in the cost of production of goods and services, it is likely that cost push inflation will occur. Increase in cost of production mainly occurs due to an increase in the employees wages. This type of inflation can be promptly seen in the oil markets. When OPEC reduces oil supply, prices are artificially driven up and result in higher prices at the pump. This Type of Inflation is also known as Supply shock inflation.
Sectoral Inflation Sectoral inflation is also another major kind of inflation. In a particular sector, when there is an increase in the prices of goods and services it is known as sectoral inflation. When a particular sector if affected from inflation, it is obvious that the employees of that sector and its related sector will also have some impact of inflation. This type of inflation has a major role in aviation industry, ticket fares tend to rise due to an increase in the prices of oil which directly affects the aviation industry and also its employees
Import Cost Push Inflation This Type of Inflation mainly occurs in the third world countries. When a country is highly dependent on the imports and the import prices rises, import cost inflation
occurs. Just take an example of third world countries. They are very much dependent on oil and when in 2008 oil prices raised, this type of inflation created havoc in their economy.
Hyper Inflation Generally, this type of inflation occurs after war however it is transitory. Inflation is an increase in the overall level of prices or decrease in the value of money. If inflation is extraordinarily high (e.g. at least 50% per month), it is often called hyperinflation. This type of inflation affects the market economy adversely during the wartime. Hyper inflation can often tumble a countrys monetary system. This type of inflation affected Zimbabwe very badly. In November 2008, in Zimbabwe, Highest monthly inflation rate was 79,600,000,000% which is equivalent to 98% daily inflation rate. This type of inflation is also very detrimental for economies.
Mild Inflation
When general price level shows mild rising trend, it is regarded as mild inflation. It is said that mild inflation like 1 to 3 percent per year encourages economic activities and stimulates economic growth
Monetary inflation Monetary inflation was most famously seen in Weimar Germany during the 1920s, when the German government went crazy with the printing presses to the point where it took billions of marks to equal one dollar. This wiped out the savings of the middle class, most members of which were compensated with (worthless) "million mark" notes, and eventually led to the rise of Hitler. Fiscal inflation Fiscal inflation is due to excess government spending, for which the budget deficit is a reasonably good proxy. It originated in the "guns and butter" spending of President Lyndon Baines Johnson in the 1960s, and similar spending of todays President George W. Bush. We have war spending without a "war economy" e.g. rationing or wage and price controls, and if the 1960s are any guide, we will be paying the price later this decade and in the 2010s. Foreign exchange inflation Foreign exchange inflation is particularly scary to me, someone who lived in Mexico before and during the peso crisis in 1994. This happens when the local currency (pesos in this case) falls dramatically against other world currencies, thereby sharply raising the price of imported goods, and hence the overall price level.
