Inflation

          Inflation

Inflation is commonly understood as a

situation of substantial and rapid general

increase in the price level and consequent fall the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized

by an overflow of money and credit. In

fact, the root cause of inflation is the

expansion of money supply beyond the

normal absorbing capacity of the economy. The behaviour of general prices

is measured through price indices.The

trend of price indices reveals the course

of inflation or deflation in the economy. Crowther defines inflation as “a state in

which the value of money is falling,ie.,

prices are rising”. Professor Samuelson

defines “Inflation occurs when the general

level of prices and costs is rising”. 

 Types of Inflation.

On different grounds, economists have

classified inflation into various types. According to the rate inflation there

are four types of inflation.

1) Moderate Inflation

2) Running Inflation

3) Galloping Inflation

4) Hyper Inflation

Moderate inflation is a mild and tolerable

form of inflation. It occurs when prices are

rising slowly. When the rate of inflation is

less than 10 per cent annually, or it is a

single digit annual inflation rate, it is considered to be moderate inflation in the

present day economy. It does not disrupt

the economic balance. It is regarded as

stable inflation in which the relative prices do not get far out of line. When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. When prices are rising at double or triple digit rates of 20,100 or 200 per cent a year, the situation may be described as galloping inflation. Galloping inflation is really a serious problem. It causes economic distortions and disturbances. In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per year.There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 per cent times.Hyper inflation is a monetary disease. 

Two Types of Inflation on the Basis of

Cause of Origin: They are Demand Pull

Inflation and Cost Push Inflation. 

A) Demand Pull Inflation - 

According to the demand-pull theory, prices rise in response to an excess of aggregate demand over existing supply of goods and services. It is also called excess- demand inflation. In the excess-demand theories of inflation, excess demand means aggregate real demand for output in excess of maximum feasible, or

potential, or full employment, output (at

the going price level). The demand-pull

theorists point out that inflation (demand-

pull) might be caused, in the first place,

by an increase in the quantity of money. Demand-pull or just demand inflation may

be defined as a situation where the total

monetary demand persistently exceeds

total supply of real goods and services at

current prices, so that prices are pulled

upwards by the continuous upward shift

of the aggregate demand function.

Causes of Demand-pull inflation are

1) Increase in Public Expenditure 2)

Increase in Investment 3) Increase in

money supply.

Cost Push Inflation - 

Cost push inflation or cost inflation is

induced by the wage-inflation process. This is especially true for a Country like

India, where labour intensive techniques

are commonly used. Theories of cost-

push inflation (also called sellers’ or

mark-up inflation) came to be put forward

after the mid-1950s.They appeared

largely in refutation of the demand-pull

theories of inflation and three important

common ingredients of such theories are

1) that the upward push in costs is

autonomous of the demand conditions in

the concerned market 2) that the push

forces operate through some important

cost component such as wages, profits

(mark up), or materials cost. Accordingly,

cost-push inflation can have the forms of

wage-push inflation, profit-push inflation, material-cost push inflation, or inflation of

a mixed variety in which several push

factors reinforce each other and that the

increase in costs is passed on to buyers of

goods in the form of higher prices, and

not absorbed by producers. Thus, a rise

in wages leads to a rise in the total cost

of production and a consequent rise in

the price level, because fundamentally,

prices are based on costs.It has been

said that a rise in wages causing arise in

prices may , in turn , generate an inflationary spiral because an increase

would motivate the workers to demand

more wages.

Causes of Inflation

1) Over- Expansion of Money Supply:

Many a times a remarkable degree of

correlation between the increase in money and rise in the price level may be observed. The Central Bank (India’s

RBI) should maintain a balance between money supply and production and supply of goods and services in the economy. Money supply exceeds the availability of goods and services in the economy, would lead to inflation.

2) Increase in Population: Increase in

population leads to increased demand

for goods and services. If supply of commodities are short, increased demand will lead to increase in price and inflation.

3) Expansion of Bank Credit: Rapid

expansion of bank credit is also responsible for the inflationary trend in a country.

4) Deficit Financing: Deficit financing

means spending more than revenue. In this case government of India accepts more amount of money from the Reserve Bank India (RBI) to spend for undertaking public projects and only the government of India can practice deficit financing in India. The high doses of deficit financing which may cause reckless spending, may

also contribute to the growth of the

inflationary spiral in a country.

5) High Indirect Taxes: Incidence of

high commodity taxation. Prices tend

to rise on account of high excise duties imposed by the Government on raw materials and essentials.

6) Black Money: It is widely condemned that black money in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in

prices.

7) Poor Performance of Farm Sector: If

agricultural production especially foodgrains production is very low, it would lead to shortage of foodgrains, will lead to inflation. 

8) High Administrative Pricing

Other reasons are capital bottleneck, entrepreneurial bottlenecks, infrastructural bottlenecks and foreign exchange bottlenecks.