Types of Inflation

Inflation can be defined as the process of a steady rise in the prices of goods or services over a while. Every time the inflation in an economy increases, each currency unit buys comparatively lesser goods or services. In this article, we will read about types of inflation with other related topics. 

Types of inflation 

Generally, three kinds of inflation occur in an economy. These are as follows – 

1. Demand-pull inflation 
2. Cost-push inflation 
3. Built-in inflation 

Concept of Demand-pull Inflation 

When the aggregate demand in the economy increases, resources to produce the goods fall short. This condition leads to demand-pull inflation. 

• Causes of Demand-pull Inflation 

There are the five causes of demand-pull Inflation – 

• A growing economy 

A growing economy is one of the major reasons for demand-pull inflation. When an economy grows, people feel confident and tend to spend more. They start to invest money which ultimately increases the money supply in the economy. However, gradually, it starts to bring the condition of demand-pull inflation. 

• Increase in money supply 

When there is too much money circulation in the economy, inflation rates go higher. It generally occurs when the government is under high debt, and they decide to mint new currency to pay off the debt. If not taken care of, this condition can also lead to hyperinflation. 

• Strong branding 

Great marketing techniques increase the demand for a particular product, leading to inflation. It happens because whenever there is a strong demand for specific products or services, their prices will certainly go up. 

• Technological innovations 

Today, we live in a technology-enabled environment where people look for highly-advanced products and the latest gadgets. As a result, it increases demand for such products and ultimately leads to demand-pull inflation.  

• Expectation of inflation 

At times people expect the condition of inflation in an economy. In such situations, they tend to buy goods to avoid future high prices. This elevates the demand for a particular product, causing demand-pull inflation.

Concept of Cost-push Inflation 

In simple terms, the cost-push inflation is when the supply of goods or services decreases, and demand remains the same. It generally occurs when there is a monopoly, which means that a single seller or producer dominates the market. Apart from this, there are other reasons for cost-push inflation too. 

• Causes of Cost-push Inflation 

Although this condition is rare in an economy, the following circumstances can cause cost-push inflation:

• Monopoly 

There are several companies that have successfully managed to achieve a monopoly in an economy. But sometimes, they can decrease the aggregate supply of goods or services to bring the condition of cost-push inflation and earn maximum profit. 

• Wage inflation 

The second and the most common reason why the cost-push inflation might occur is wage inflation. It happens when workers demand higher wages, and the producers decide to increase the product cost to meet workers’ expectations. 

• Natural disaster 

Natural disasters also lead to inflation as they affect the overall supply of goods and services. They limit the supply of a particular product without eliminating or even decreasing the demand, leading to inflation. For instance, when an earthquake hit Japan in 2011, it disrupted the global supply of automobile parts. 

• Rules and regulations  

The government’s rules and regulations can also reduce the overall supply of goods to a larger extent. When the government imposes or increases taxes on specific goods or services, it raises their prices and leads to inflation. 

Concept of built-in inflation 

It can also be called self-made inflation. It occurs when workers expect their wages to grow consistently with the overall price increase to maintain their cost of living. However, increasing workers’ wage leads to a higher cost of production, and companies tend to increase the prices of goods or services to meet the workers’ demand, leading to inflation.

Conclusion 

Inflation can be defined as the process of a steady rise in the prices of goods or services over some time. There are mainly three types of inflation: demand-pull, cost-push, and built-in inflation. Besides, several factors affect the inflation rate in an economy. A moderate inflation rate is considered suitable for most economies; however, higher inflation can threaten the financial condition of any country.