What is Inflation? Definition, Type, Cause

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What is Inflation?

Inflation can be defined as the persistent increase in the price level of goods and services in an economy over a period of time.

If the rise in prices exceeds the rise in output, the situation is called inflationary situation.

Inflation can take place due to various reasons. One of the major reason is a rapid increase in money supply which leads to a decrease in interest rate.


Inflation Definition

Some of the important inflation definitions are:

Inflation is a rise in the general level of prices.

Samuleson-Nordhaus, “

Inflation can be defined as, “too much money chasing too few goods.”

Coulborn

Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability.

Parkin and Bade

The word inflation in the broadest possible sense refers to any increase in the general price-level which is sustained and non-seasonal in character.

Peterson

Inflation is an increase in the quantity of money faster than real national output is expanding.

Johnson

Read: Business Economics | Definition, Scope, Importance


Causes of Inflation

So what exactly causes inflation in an economy? Following are some other causes of inflation:

  • Increase in demand because of a rise in individual and aggregate disposable income on consumption and investment goods, rise in exports, and rise in population.

  • No rise in output in response to increase in demand due to lack of capital equipment, factors of production, decrease in imports due to restrictive policies, and the emergence of drought, famine or any other natural calamity.

Read: Microeconomics vs Macroeconomics | What, Difference, Definition


Characteristics of Inflation

Inflation is desirable in a country at moderate levels. However, there is no universally acceptable limit of inflation. Depending on the contribution, a country decides the acceptable limit of inflation.

The concept of inflation can be understood by studying the characteristics of inflation, which are given as follows:

  • Inflation is followed by the price rise.
  • The cause behind inflation is increase in the money supply. Thus, it is a monetary phenomenon.
  • Due to interaction among various economic forces, inflation is also an economic phenomenon.
  • Inflation occurs in a dynamic environment over a period of time.
  • Inflation is always scarcity oriented and occurs in a disequilibrium state of economy.
  • The rise in prices in inflation cannot be reversed.
  • Inflation is persistent in nature. Generally, inflation is categorised on the basis of its rate.

Read: Nature of Economics | As a Science, Art and Social Science


Three Types of inflation

Let us discuss these three types of inflation in detail. Three types of inflation are:

  1. Moderate inflation
  2. Galloping inflation
  3. Hyperinflation

Moderate Inflation

Moderate Inflation is a type of inflation that takes place when there is a rise in the prices of goods and services at a single rate annually. Moderate inflation is also known as creeping inflation.

At the time of moderate inflation in an economy, the prices of goods and services increase only at a moderate rate. However, the rate of increase in prices differs in different countries. It is easy to anticipate moderate inflation; therefore, individuals hold money as a store of value.

Galloping Inflation

Galloping Inflation is a type of inflation that takes place at the time of the rise in the prices of goods and services at a two-digit or three-digit rate per annum. Another name for galloping inflation is as jumping inflation.

In the words of Baumol and Blinder, “Galloping inflation refers to inflation that proceeds at an exceptionally high.”

The worst sufferers of galloping information are middle and lower class individuals. Due to this, people are unable to save money for the future. This kind of situation requires strict measures to control inflation

Hyperinflation

Hyperinflation is a type of inflation that takes place when the rate of increase in prices is extremely high or out of control. In other words, hyperinflation occurs when the increase in prices is more than a three-digit rate annually.

The cause behind hyperinflation is the unrestricted increase in the supply of money in the market. This results in a situation of imbalance in the supply and demand for money. Consequently, money loses its real worth at a rapid speed.

Read: Business Cycle | Definition, Phases, Example


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