Several economists have described the inflation in different ways. For example Coulborn define inflation as “Too much money chasing too few goods.” According to Crowther “Inflation is a state of economy in which the value of money is falling, i.e. prices are rising.” In simple words we can say that inflation is the consistent increase in general prices over long period of time. This rise in general price indicates imbalance between demand and supply of goods at current prices.
What are the types of Inflation
Cost Push Inflation
Cost push inflation is a type of inflation which is occurred due to increase in the costs of products and services. The basic phenomenon is that manufacturing firms acquire goods and services at the higher prices due to which they earn lower profits. So in order to earn the required amount of profits these firms pass on their increased costs to the consumers and thus inflation emerges. Usually cost of the production increases due to such factors as higher demand for wages, increased tax burden by government, higher prices of raw materials etc.
Demand Pull Inflation
Another type of inflation is demand pull inflation which is occurred due to increase in the aggregate demand for the products and services. Due to higher aggregate demand, profit margins of producers also increase so they try to produce more by utilizing all the resources. But resources are scarce therefore disequilibrium between demand and supply arises. It means that people demand more than the available supply so prices shoot up.
Mild inflation indicates a slow rise (say 3% to 4%) in general price level for a long period of time. Such type of inflation shows a favorable growth in the economy and thus should be maintained for the progress of country. When the prices rise gradually the profits of businessmen and industrialists also rise and they try to produce more. As a result they employ more workers to increase the production. In this way demand for labor increases which results in the increase of employment.
Suppressed inflation is type of inflation in which temporary measures are taken to prevent the inflation but it eventually leads to inflation. In such cases, supply of basic essentials e.g. agricultural products is fixed by the government by introducing price controls on the commodities. It is called suppressed inflation because the prices are suppressed through price control. In suppressed inflation, price control is lower than the equilibrium price but with the passage of time inflationary pressures exerts their full strength and thus leads the control price to equilibrium level.
Hidden inflation occurs because in some cases government imposes strict measures of price control to curb the inflation. In such situations, entrepreneurs are compelled to sell the commodities at the required prices. Now because the entrepreneurs cannot sell the commodities at higher prices to get the required profit therefore they lower down the quality of products. It means that entrepreneurs are selling the lower quality products at higher prices and this is hidden inflation.
The situation where both unemployment and the rate of inflation are high is known as stagflation. It is the combination of two words i.e. stagnation of the economy and inflation in the economy. Basically stagflation of economy refers to a situation in which the investment in country is growing but the real income is constant or is growing slowing. Such type of situation occurs because of increase in population. With the increase in population, demand for goods and services increases along with the money supply which leads to inflation.