Ans: Inflation is a persistent increase in the general price
level of goods and services in an economy
over a period of time. In other words, the
rate at which the general level of prices for goods and services is rising,
and, subsequently, purchasing power is falling. Central banks attempt to stop
severe inflation, along with severe deflation, in an attempt to keep the
excessive growth of prices to a minimum.
Types of Inflation:
1.
Types of Inflation on Coverage: Types of
inflation on the basis of coverage and scope point of view:-
a.
Comprehensive Inflation: When the
prices of all commodities rise throughout the economy it is known as
Comprehensive Inflation. Another name for comprehensive inflation is Economy
Wide Inflation.
b.
Sporadic Inflation: When prices of only few
commodities in few regions (areas) rise, it is known as Sporadic Inflation. It
is sectional in nature. For example, rise in food prices due to bad monsoon
(winds bringing seasonal rains in India).
2. Types of Inflation on
Time of Occurrence: Types of inflation on
the basis of time (period) of occurrence:-
a.
War-Time Inflation : Inflation that takes place during the period of a
war-like situation is known as War-Time inflation. During a war, scare
productive resources are all diverted and prioritized to produce military goods
and equipments. This overall result in very limited supply or extreme shortage
(low availability) of resources (raw materials) to produce essential
commodities. Production and supply of basic goods slow down and can no longer
meet the soaring demand from people. Consequently, prices of essential goods
keep on rising in the market resulting in War-Time Inflation.
b. Post-War
Inflation: Inflation that takes place soon after a war is known as Post-War
Inflation. After the war, government controls are relaxed, resulting in a
faster hike in prices than what experienced during the war.
c.
Peace-Time Inflation: When prices rise during a normal period of peace, it
is known as Peace-Time Inflation. It is due to huge government expenditure or
spending on capital projects of a long gestation (development) period.
3. Types of Inflation on
Government Reaction: Types of inflation on
basis of Government's reaction or its degree of control:-
a.
Open Inflation: When government does
not attempt to restrict inflation, it is known as Open Inflation. In a free
market economy, where prices are allowed to take its own course, open inflation
occurs.
b.
Suppressed Inflation: When government
prevents price rise through price controls, rationing, etc., it is known as
Suppressed Inflation. It is also referred as Repressed Inflation. However, when
government controls are removed, Suppressed inflation becomes Open Inflation.
Suppressed Inflation leads to corruption, black marketing, artificial scarcity,
etc.
4.
Types of Inflation on Rising Prices:
Types of inflation on the basis of rising prices or rate of inflation:-
a.
Creeping Inflation: When prices are
gently rising, it is referred as Creeping Inflation. It is the mildest form of
inflation and also known as a Mild Inflation or Low Inflation. According to
R.P. Kent, when prices rise by not more than (up to) 3% per annum (year), it is
called Creeping Inflation.
b.
Chronic Inflation: If creeping inflation
persist (continues to increase) for a longer period of time then it is often
called as Chronic or Secular Inflation. Chronic Creeping Inflation can be
either Continuous (which remains consistent without any downward movement) or
Intermittent (which occurs at regular intervals). It is called chronic because
if an inflation rate continues to grow for a longer period without any
downturn, then it possibly leads to Hyperinflation.
c. Walking
Inflation: When
the rate of rising prices is more than the Creeping Inflation, it is known as
Walking Inflation. When prices rise by more than 3% but less than 10% per annum
(i.e. between 3% and 10% per annum), it is called as Walking Inflation.
According to some economists, walking inflation must be taken seriously as it
gives a cautionary signal for the occurrence of running inflation. Furthermore,
if walking inflation is not checked in due time it can eventually result in
Galloping inflation.
d.
Moderate Inflation: Prof. Samuelson
clubbed together concept of Creeping and Walking inflation into Moderate
Inflation. When prices rise by less than 10% per annum (single digit inflation
rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a
stable inflation and not a serious economic problem.
e.
Running Inflation: A rapid acceleration
in the rate of rising prices is referred as Running Inflation. When prices rise
by more than 10% per annum, running inflation occurs. Though economists have
not suggested a fixed range for measuring running inflation, we may consider
price rise between 10% to 20% per annum (double digit inflation rate) as a
running inflation.
f.
Galloping Inflation: According to Prof.
Samuelson, if prices rise by double or triple digit inflation rates like 30% or
400% or 999% per annum, then the situation can be termed as Galloping
Inflation. When prices rise by more than 20% but less than 1000% per annum
(i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also
referred as Jumping inflation. India has been witnessing galloping inflation
since the second five year plan period.
g.
Hyper inflation: Hyperinflation refers to a
situation where the prices rise at an alarming high rate. The prices rise so
fast that it becomes very difficult to measure its magnitude. However, in
quantitative terms, when prices rise above 1000% per annum (quadruple or four
digit inflation rate), it is termed as Hyperinflation. During a worst case
scenario of hyperinflation, value of national currency (money) of an affected
country reduces almost to zero. Paper money becomes worthless and people start
trading either in gold and silver or sometimes even use the old barter system
of commerce. Two worst examples of hyperinflation recorded in world history are
of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009
under Robert Mugabe's regime.
5.
Types of Inflation on Causes: Types of inflation on
the basis of different causes:-
a.
Deficit Inflation: Deficit inflation
takes place due to deficit financing.
b.
Credit Inflation: Credit inflation takes place due
to excessive bank credit or money supply in the economy.
c.
Scarcity Inflation: Scarcity inflation
occurs due to hoarding. Hoarding is an excess accumulation of basic commodities
by unscrupulous traders and black marketers. It is practiced to create an
artificial shortage of essential goods like food grains, kerosene, etc. with an
intension to sell them only at higher prices to make huge profits during
scarcity inflation. Though hoarding is an unfair trade practice and a punishable
criminal offence still some crooked merchants often get themselves engaged in
it.
d.
Profit Inflation: When entrepreneurs are interested
in boosting their profit margins, prices rise.
e.
Pricing Power Inflation: It is often referred
as Administered Price inflation. It occurs when industries and business houses
increase the price of their goods and services with an objective to boost their
profit margins. It does not occur during a financial crisis and economic depression,
and is not seen when there is a downturn in the economy. As Oligopolies have
the ability to set prices of their goods and services it is also called as
Oligopolistic Inflation.
f.
Tax Inflation: Due to rise in indirect taxes,
sellers charge high price to the consumers.
g.
Wage Inflation: If the rise in wages in not
accompanied by a rise in output, prices rise.
Current
Inflationary Position: Wholesale Price Index
(WPI) which remained high through 2011 due to increasing global commodity prices and high crude prices
has started showing signs of moderation
and it is expected to touch 6.5 to 7 percent by March 2012. It may further
moderate during 2012-13 due to tightening of monetary policy and other measures
put in place by the Government. Taking stock of the price situation, Economic
survey 2011-12 has observed that in the current financial year the gap between
WPI and CPI inflation has significantly narrowed due to drastic fall in food
inflation. The survey comments that the objective of monetary policy during
2011-12 has been to rein in inflation and contain inflationary expectations.
However, the RBI has addressed liquidity
concerns via the use of its standard tools. The monetary market has, in general,
remained orderly during 2011-12 with the rates in collateralized segments
moving in tendem with the call rate, but generally remaining below it. The
Indian Economy, which is one of the largest emerging markets globally, is
struggling with one of its quickest inflations. The rate of increase in the
prices of non-food manufactured goods is a proper indicator of core inflation.
|
Month
|
Inflation
Rate
|
|
July 2011
|
8.43%
|
|
August 2011
|
8.99%
|
|
September 2011
|
10.06%
|
|
October 2011
|
9.39%
|
|
November 2011
|
9.34%
|
|
December 2011
|
6.49%
|
|
January 2012
|
5.32%
|
|
February 2012
|
7.57%
|
|
March 2012
|
8.65%
|
|
April 2012
|
10.22%
|
|
May 2012
|
10.16%
|
|
June 2012
|
10.05%
|
Impact
of Inflation on Business Sector:
In simple language, inflation means rising prices and it shows the
increase in cost of living. In economics, inflation is explained as rise in the general
level of prices of goods and services in an economy over a period of time. With
the rise in price levels a unit of currency will buy fewer goods and services.
As a result, the purchasing power of money will be reduced with inflation. In
other words the real value of money will be lost day by day along with
inflation. Inflation is measured by the Rate
of Inflation or Inflation Rate which
is the percentage change in a general price index calculated as an annualized
figure.
A low inflation rate is
beneficial to a country and zero or negative inflation is considered as bad.
Also, a high inflation is harmful to an economy and it affects an economy in
many ways.
·
High
inflation distorts consumer behavior: Because of the
fear of price increases, people tend to purchase their requirements in advance
as much as possible. This can destabilize markets creating unnecessary
shortages.
·
High
inflation redistributes the income of people: The fixed income
earners and those lacking bargaining power will become relatively worse off as
their purchasing power falls.
·
Trade
unions may demand for higher wages at times of high inflation: If
the claims are accepted by the employers, it may give rise to a wage-price
spiral which may aggravate the inflation problem.
·
Difficulty
in Predicting Future: During a high inflation period, wide
fluctuations in the inflation rate make it difficult for business organizations to predict the
future and accurately calculate prices and returns from investments. Therefore,
it can undermine business confidence.
·
Create
Trade Deficit: When inflation in a country is more than that in a
competitive country, the exports from former country will be less attractive
compared to the other country. This means there will be fewer sales for that
country’s goods both at home and abroad and that will create a larger trade
deficit. At the same time, high inflation in a country weakens its competitive
position in the international market.
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