Inflation – Introduction
- Inflation – Introduction
- What is Inflation?
- Types of Inflation
- Types of Inflation Defined by Rate of Increase
- Core Inflation
- Final Thoughts
- Frequently Asked Questions
As the cost of living continues to rise, a continuous rise in prices can be frightening. But why do prices continue to rise at predictable intervals? All of this can be attributed to one word that inspires fear across nations: inflation. In the past, different inflation kinds have wreaked havoc on countries that have had high inflation rates. Despite its intolerance for greater inflation rates, India’s track record indicates that it hasn’t faced hyperinflation since 1801. Several types of inflation were discussed here.
What is Inflation?
Inflation is defined as an increase in the price of products and services as a result of rising processing costs. In basic terms, if a little pack of dairy milk chocolate cost Rs. 2 per piece a decade ago, it now costs Rs. 10 per piece due to inflation. As a result of rising pricing owing to types, your purchasing power for the same things would dwindle. Modest levels of inflation can help to boost economic growth; but, a higher rate of inflation is viewed as a slow poison that can quickly devastate your economy.
Types of Inflation
Inflation can take many different forms. The numerous types of inflation are outlined below:
1. Demand-pull Inflation
When demand for products and services exceeds supply, demand-pull inflation occurs, putting upward pressure on the pricing of those goods and services. To put it another way, it’s when there are too many dollars chasing too little things. Price increases can be caused by rising costs and a shortage of supplies. Sellers will endeavor to boost their supply to close the gap and bring prices back to a moderate level during such inflation.
2. Cost-push Inflation
When prices rise due to an increase in the cost of raw materials or salaries, this is known as cost-push inflation. The pace of supply in the economy will drop as the cost of production rises. As demand for goods grows, suppliers are forced to pass on the increased underlying prices to customers, resulting in cost-pull inflation. When there is a monopolistic product on the market, this phenomenon occurs. Even when costs grow, demand for a monopolistic product remains constant, resulting in cost-push inflation.
3. Built-in Inflation
When people expect inflation to rise at a steady rate in the future, this is known as built-in inflation. An increase in pricing also leads to a higher demand for pay increases so that individuals may afford the higher standard of living. As a result, wage workers begin to seek wage hikes, increasing the cost of production. These inflation types are caused by rising production costs combined with rising demand. This never-ending vicious circle continues.
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Types of Inflation Defined by Rate of Increase
Varying inflation rates characterize different inflation categories, which are detailed below:
1. Creeping Inflation
As prices rise at a slower rate, it is called creeping inflation. Creeping inflation, for example, is defined as a year-over-year increase in inflation from 2% to 3% or 4%. Because of its gradual movements, this sort of inflation is difficult to detect, but it can become a problem in the long run. In most cases, creeping inflation stays between 1% and 4%. Creeping inflation is well-known in the United Kingdom and Canada.
2. Walking Inflation
Walking inflation occurs when price rises are gradual and the rate of inflation remains below 10% over time. While walking inflation is not considered a issue, any rate of inflation above 4% is cause for concern. When inflation exceeds 4%, central banks begin to tighten their liquidity policies. Walking inflation usually stays between 2% and 10%. Walking inflation is common in India and the United States.
3. Running Inflation
When there is a considerable increase in price levels, this is known as running inflation. It is usually considered a red flag when prices continue to rise rapidly. A country with a higher inflation rate must incur extra costs at the expense of its economic growth. Running inflation usually stays between 10% and 20%. Turkey and Ethiopia are both notorious for their high inflation rates.
4. Galloping Inflation
When prices rise rapidly over time, this is known as galloping inflation. Such fast price changes are difficult to control over time and are often damaging to economic growth. Running inflation usually stays between 20% and 100%. Galloping inflation is just one notch below hyperinflation. Zimbabwe and Lebanon are noted for their high inflation rates.
Hyperinflation is a type of severe inflation that is impossible to regulate beyond a specific time frame. Price increases during hyperinflation are so quick that keeping track of them is difficult. Rapid price changes can occur on a daily basis, resulting in a decrease in the overall value of money. Running inflation is usually around 1000%. Venezuela is known for its hyperinflation, which is currently at 2720%.
Core inflation is a metric that excludes the transient fluctuations in the prices of specific goods, such as food and energy drinks. In India, the Consumer Price Index (CPI) is used to compute the core inflation rate, which excludes volatile items and commodities. As a result, the core inflation estimates do not account for transient price movements, which might alter overall inflation levels and emphasize an incorrect picture.
Inflation types can be detrimental to the health of any economy if it is not kept under control. The Central Banks use various liquidity measures through the monetary policy that helps in keeping inflation under check. Inflation types rate remaining at a steady level through various measures can flourish your economy.
Frequently Asked Questions
What is inflation?
It is described as the country’s currency’s losing value/power over time.
What is deflation?
It is defined as the country’s currency’s increasing value/power through time.
Is inflation bad?
Only if it’s under control. Inflation that is too high or too low is also destructive to the country.
What are inflation effects?
It can be beneficial to exporters if it causes the value of a country’s currency to fall.
What are the types of inflation?
Demand-pull, cost-push, and built-in are the three main categories.