It is a steady an upward movement in the level of prices, decreasing purchasing power over a period of time, usually one year. Inflation can be defined as a continuous increase in the general price level of goods & services in the economy.
According to Prof. Crowther, Inflation is a state in which the value of money is falling and prices are rising. According to Prof. Kemmerer, Inflation means too much currency in comparison to the physical volume of business done. Keynes stated that the rise in the price level after the point of full employment is true Inflation.
Measures of Inflation
In India, inflation is measured by using WPI (wholesale price Index). An index of several goods & services is prepared. India’s WPI is a weighted index of 435 commodities; it means price rise of all commodities will not be treated equally.
Example: The price rise of rice will have more weight-age than a price rise of a car. That is because rice is consumed by a large number of people as compared to a car.
In USA, UK, China CPI (Consumer price index) is used to measure inflation. In India, WPI is reported by Labour Bureau, Government of India.
Types of Inflation
1. On the basis of rate of inflation
- Open Inflation: In a free market economy, prices go up freely due to supply-demand imbalances leading to open inflation. It is not checked by government. Since market is allowed to function without interference, it is called open inflation.
- Suppressed inflation: On the other hand suppressed inflation occurs in a controlled economy where the upward pressure on prices is not allowed to influence the quoted or managed prices. According to Milton Friedman suppressed inflation is dangerous than open inflation.
2. On the basis of degree of control
- Creeping inflation: There is moderate rise in prices of 2-3 percent per annum in creeping It is generally considered good for a growing economy. Mildly rising prices result in faster growth of output as they raise the profit margins of firms and encourage them to produce more.
- Walking Inflation: When price increase over a decade between 30-40 percent or at the rate of 4 percent per annum that inflation is also known as walking inflation.
- Running Inflation involves more accelerated movements in prices than in case of either creeping or walking. When price are rising at the rate of about 10 percent per annum or about 100 percent in a decade, it may be treated as a state of running inflation. It is a warning Suitable measures are required to take place.
- Hyper Inflation: In these types of inflation price rise at double or triple digit rates per Hyper inflation is extreme form of inflation. It seriously cripples the economy. When there is no control over running inflation, then the situation comes under hyper inflation.
3. On the basis of Degree of causes
- Cost-Push Inflation: Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services.
- Demand-Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macro economy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence "bid prices up", again cause inflation. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy.