What Is Inflation ? - Causes, Types Of Inflation

Let’s read about What Is Inflation ?, Causes Of Inflation, Types Of Inflation and Methods To Control Inflation

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What Is Inflation ? – Causes, Types and Methods To Control Inflation -:

WHAT IS INFLATION ? -:

Inflation is a general increase in the price level of goods and services in the economy over time. If the price of one good and service has gone up, it is not inflation; it is inflation only if the prices of most goods and services have gone up. Inflation is the decline of purchasing power of a given currency over time. Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.

Inflation is a condition of price rise. The reason for price rise can be classified under two points -: (1) Increase in demand (2) Reduced supply.

When the general level of prices is falling over a period of time this is deflation, the opposite situation of inflation. It is also known as disinflation.

CAUSES OF INFLATION -:

1 – Demand Pull Inflation :-

This type of inflation is caused due to an increase in aggregate demand in the economy. High demand and low production or supply create a demand-supply gap, which leads to a hike in prices.

2 – Cost Push Inflation :-

This type of inflation is caused due to various reasons such as Depreciation of Currency, Crude oil price fluctuation, Increase in price of inputs, Interest rates increased by RBI, Hoarding and Speculation of commodities, Defective Supply chain, Increase in indirect taxes, Defective food supply chain, Rise in Minimum Support Price, Low growth of Agricultural sector, Food Inflation.

HOW INFLATION MEASURED ? -:

In India, the Ministry of Statistics and Programme Implementation (MoSPI) measures inflation.

In India, The rate of inflation is measured on the basis of price indices which are of two kinds.

Wholesale Price Index (WPI)
Consumer Price Index (CPI)

TYPES OF INFLATION -:

LOW INFLATION -:

This type of inflation is slow and on predictable lines, which might be called small or gradual. Such inflation has also been called as creeping inflation. Low inflation takes place in a longer period and the range of increase is usually in single digit.

GALLOPING INFLATION -:

This is a very high inflation running in the range of double-digit or triple digit. Some other names to this inflation are hopping inflation, jumping inflation and running or runaway inflation.

HYPERINFLATION -:

In such type of inflation not only the range of increase of prices is very large, but the increase takes place in a very short span of time, prices shoot up overnight.

BOTTLE NECK INFLATION -:

This type of Inflation could be put in the demand-pull inflation category. This inflation takes place when the supply falls drastically and the demand remains at the same level. Such situations arise due to supply-side hurdles, hazards or mismanagement which is also known as structural inflation.

CORE INFLATION-:

Core Inflation is popular in western economies, core inflation shows price rise in all goods and services excluding energy and food articles. This is based on the inclusion or exclusion of the goods and services while calculating inflation.

METHODS TO CONTROL INFLATION -:

SUPPLY SIDE MEASURE -:

As a supply side measure, the government may go for import of goods which are in short-supply or increase the production to matching the level of demand. Storage, transportation, distribution, hoarding are the other aspects of price management of this category.

COST SIDE MEASURE -:

As a cost side measure, governments may try to cut down the price with the help of tax breaks like cuts in the excise and custom duties. And Increasing income of the people is the monetary measure to avoid such type of inflation.

MONETARY POLICY -:

The governments may take recourse to tighter monetary policy to cool down either the demand-pull or the cost-push inflations. Monetary policy is one of the most commonly used measures taken by the government to control inflation. It uses tools like – Bank rate, Repo Rate, Open market operations, etc.

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