Inflation, Stages and Types of Inflation

An economic indicator that shows the rate of increasing prices of services and goods in the economy is inflation. Finally, this shows the decrease in purchasing power of the rupee. We measure this as a percentage.

We can check the improvement, the decrease, and the increase from the prior period by checking the percentage. Inflation can become a serious problem as the rise of inflation leads to decrement in money.

What is inflation

Inflation aims to measure the rate of an overall impact of change in prices of different services and goods for a certain period. Inflation is a quantitative measure. The commodities include metal, food grains, fuels, as well as utilities like transportation, electricity, and services, including entertainment, healthcare, labor, etc. 

This shows the changes in average prices for some selected goods. Inflation also affects the country’s economy directly and indirectly. This also affects the inflation rate in India. 

We can measure inflation in several ways. This depends on what type of services and goods we consider. This is the opposite of deflation, which shows the decline that occurs in commodities when the rate of inflation comes below 0%.

What causes inflation

Although inflation plays a different role in the economy, the main cause of inflation is an increase in the money supply. Money supply increases by monetary authorities by giving more money to the person. This happens by reducing the value or devaluing the legal currency. Or by taking new money as a loan and considering it into existence as credits of a reserve account by purchasing bonds by the government from banks on the secondary market.  

The money drastically loses its purchasing power in these cases of money supply increment. This mechanism of how inflation works is of three types;

• Built-in inflation – In built-in inflation, the cost of production rises as labourers seek higher wages, leading to built-in inflation.
• Cost-push inflation – It happens when the cost of labour and raw materials rises, causing overall prices to rise.
• Demand-pull inflation – When the economy’s aggregate demand exceeds the economy’s aggregate supply, demand pull inflation occurs.

Types of inflation;

There are different types of inflation. Categorizing by the speed, it’s of four main types;

• Creeping inflation

This type of inflation’s called mild inflation. When the annual rise in prices is less than 3% or 3%, creeping inflation takes place. It’s said by the federal reserve that a rise in prices by 2% can benefit economic growth. This boosts demand making customers expect a rise in prices. To beat future prices that may get higher than now, customers prefer to buy them at present. 

This way, creeping affects economic expansion. This is why the federal reserve sets the target inflation rate as 2%.

• Galloping inflation

Galloping inflation is a disaster for the economy when this increases to 10% or more than 10%. Money loses its value rapidly. Due to this income, employees and businesses are unable to keep up with pieces and increasing prices. In fact, due to this, foreign investors cancel the deal with the company. Government leaders lose their credibility, which leads to an unstable economy. We must avoid galloping inflation. 

• Hyperinflation

This type of inflation takes place when prices increase rapidly per month by more than 50%.

This type of inflation is very rare. Many examples of this hyperinflation take place when the government pays during wars by printing more money—for example, Germany in 1920. In 2000, Zimbabwe. Venezuela during 2010. During the civil war, the United States faced and experienced hyperinflation.

• Walking inflation

Walking inflation is between 3 to 10% annually. This is destructive and strong and harmful to the economy in one way or the other as it affects economic growth all of sudden. Customers tend to buy more than needed to avoid tomorrow’s higher prices. This demand increases so much that suppliers can’t meet their demand. Resulting to which, the price of common goods and other commodities increases and are out of reach of people. 

Apart from this, there are some asset inflations and some are wage inflation. These are,

• Stagflation – Stagflation is described as a period of high inflation that coincides with a drop in the gross domestic product (GDP). For example, stagflation occurs when a government produces currency while simultaneously raising taxes.

• Deflation – It is defined as a decrease in the level of prices in an economy and an increase in the purchasing power. Deflation is usually an indication of a deteriorating economy.
• Core inflation – It refers to the change in the cost of items, excluding food and energy sectors. Food and energy are staples, meaning demand for them doesn’t change much even as prices rise.
• Wage inflation – Also called as cost-push inflation. It happens when the cost of labour and raw materials rises, causing overall prices to rise
• Asset inflation – Asset price inflation is an economic phenomenon that indicates a rise in the price of assets. Financial instruments such as bonds, stocks, and real estate are common assets.

This is all about inflation, its types, and inflation rate in India. 

Conclusion

We can easily measure the changes in the price of a certain product. But when the quantity tends to increase, then we need a huge set of products as well as proper services with a trained host for a comfortable life. 

Inflation helps us in this as it aims to check and measure the overall changes in price for a large set of services and products. This also allows representation of the increasing price of goods for a certain period for a single value. In this article, you will know everything about inflation. Now you won’t have any questions or queries related to inflation.