All about Running Inflation

Inflation is a term used for describing a general rise in the prices of goods and services. Inflation mostly leads to a drop in the purchasing power in the country. Every time the prices of goods or services in an economy rise, each currency unit buys comparatively lesser goods and services. 

Running inflation is the stage between inflation and hyperinflation. In this situation, the inflation in an economy increases rapidly, from 10 per cent to 20 per cent on average every year. It affects the poor and middle class severely. 

What is running inflation? 

In simple terms, running inflation is a condition in an economy where the prices of goods and services increase by 10 per cent to 20 percent every year. It requires monetary and fiscal measures; else, it can lead to the condition of hyperinflation. Although running inflation is not ideal, it is far better than hyperinflation, where the result is economic collapse or switching to the barter system. If the inflation rate rises to 10%, it is referred to as running inflation.  

What are the causes of running inflation? 

• Demand-Push Inflation 

Demand push inflation is a condition where the demand for goods is higher than the supply or production of goods. This condition leads to a demand-supply gap. At times, because of increased demands, the money in the economy increases; however, the supply remains the same. This condition gives rise to running inflation. 

• Deficit Financing

If the government has a lot of debt, it sometimes decides to print new notes or currency to repay the debt. It increases the flow of money in the economy. This condition leads to an increase in the prices of goods, and people willingly buy them. As a result, the chances of running inflation occur. 

• Cost-push inflation

Because of the rising wages and increasing prices of raw materials, there can be an increase in the prices of finished goods. These costs are often paid by the consumers. There are several reasons why cost-push inflation occurs in an economy: speculation and hoarding of commodities, low growth in the agricultural sector, an increase in the prices of inputs, etc. When the cost-push inflation continues to rise for a more extended period, it can cause running inflation. 

• Built-in inflation 

If the prices of goods increase, the labour that produces the particular goods expects high wages. In order to meet their demands, producers generally choose to increase the prices of goods, passing the financial burden on consumers. This condition also occurs when the prices of raw materials increase. All these can also lead to running inflation. 

• Increase in Disposable Income

If the disposable income of the people in an economy rises, it increases their ability to buy goods and services. The disposable income can increase due to factors such as wage increment, reduction in taxes, increase in national income, reduction in people’s savings, etc. If prolonged, the condition leads to running inflation. 

• Devaluation 

Devaluation can be referred to as a downward adjustment in a country’s exchange rate. It leads to a lower value for the country’s currency. It can also cause running inflation since devalued currency’s purchasing power declines. 

Is running inflation bad for everyone? 

If the inflation is too high or too low, it can show drastic results in an economy; hence a perfect balance is necessary. A slow and steady rise of prices to a certain limit also helps the economy grow. However, running inflation is not ideal for any economy, as it results in hyperinflation, leading to the collapse of the whole economy. 

What are the effects of running inflation in an economy? 

• Effect on employment and income – As production and spending increase, the national income also increases. It gives rise to employment opportunities as there is a higher need for workers. However, the income of the people falls because of the massive fall in the purchasing power of the money. 
• Effect on government – During running inflation, the government revenue increases. However, the government is expected to spend more, leading to more public expenditure. 

Conclusion 

Running inflation is a condition in an economy where the prices of goods and services increase by 10 per cent to 20 percent every year. It requires monetary and fiscal measures; else, it can lead to the condition of hyperinflation. The Poor and middle class are the most affected due to running inflation. Demand-Push Inflation, Deficit Financing, Discretionary Fiscal Policy, Built-in inflation, etc., are major reasons that cause running inflation.