Inflation:
Meaning of Inflation :- ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods.
* Accoding to G. Ackley:- ‘a persistent and appreciable rise in the general level or aver- age of prices’. In other words, inflation is a state of rising prices, but not high prices.
* According to C.Crowther":-inflation is state in which the value of money is falling and price are rising.
Types of inflation:-
A. On the Basis of Causes:
* Currency inflation:- This type of inflation is caused by the printing of currency notes.
* Credit inflation: Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs. Such credit expansion leads to a rise in price level.
• Deficit-induced inflation: The budget of the government reflects a deficit when expenditure exceeds revenue. To meet this gap, the government may ask the central bank to print additional money. Since pumping of additional money is required to meet the budget deficit, any price rise may the be called the deficit-induced inflation.
• Demand-pull inflation: An increase in aggregate demand over the available output leads to a rise in the price level. Such inflation is called demand-pull inflation.
• Cost-push inflation: Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation . Cost of production may rise due to an increase in the prices of raw materials, wages, etc
B. On the Basis of Speed or Intensity:
• Creeping or Mild Inflation: If the speed of upward thrust in prices is slow but small then we have creeping inflation.
• Walking Inflation: If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we have a situation of walking inflation.
• Galloping and Hyperinflation: Walking inflation may be converted into running inflation.
* Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping or hyperinflation.
• Government’s Reaction to Inflation: Inflationary situation may be open or suppressed. Because of anti-inflationary policies pursued by the government, inflation may not be an embarrassing one.
* Imported inflation:- inflation caused by rising price of imports for example due to devaluation.
Cause of inflation
There are two causes of inflation
1) Internal cause of inflation
2) External cause of inflation
Internal cause of inflation:-
-high wages / labour costs
-boom in credit/ money supply
-rises in business taxes
- a large surge in property prices
External causes of inflation
-increase in world oil/gas
-depreciation of exchange rate
- higher inflation in other countries
- inflation in global commodity prices
Measurement of Inflation
* CPI - .it is measures the change in the price of consumer goods & services over some time.
* PPI - A producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.
* WPI - Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers.
EPI- Employment Cost Index (EPI) is the measurement of the changes happening in the labour costs.
*GDP Deflator:- is a measure of the price movement of goods and services included in GDP
Effects of inflation
* Effects on earnings and employment
* Effect on allocation of income and wealth
* Effect on production
* Effect on government investments
* Effect on progress
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