Inflation: Types, Causes, Measures and Control

Inflation: Types, Causes, Measures and Control

Brief Introduction:

• Inflation refers to the persistent upward movement of the general price level.
• It results in a decline of the purchase power.
• In Inflation, there is a flow of the excessive money in economy that creates excess demand in the market compared to supply.
• As a result, the producers mark higher prices for the goods and overall rise of price of various goods occurs.

Causes of Inflation-

• Increase in the Public Expenditure.
• Deficit Financing.
• Erratic Agricultural Growth.
• Agricultural price policy of the Government.
• Inadequate rise in Industrial production.
• Upward revision of administered price.
• Increase in money supply.
• Increase in Export.
• Increase in disposable Income.

Effect of Inflation-

• Due to Inflation, the purchasing power of the people of a certain category increases and that leads the high price of goods and services.
• It causes inefficiencies in market and as a result the companies can’t make the long term plan. 
• Uncertainty regarding the future of the purchasing power of the money may cause discouragement to the savings and investment.
• Due to the increased instability in exchange prices of currency as an effect of unpredictable inflation, the trade can be hampered.
• Income Tax rates may become higher.
• Higher inflation rate in an economy may result higher imports and lesser exports. This results a deficit in balance of trade.

Types of Inflation – 

Demand Pull Inflation –

• It is created and sustained by the excess of the aggregate demand of goods and services over aggregate supply.
• The demand pull inflation happens when the increase in the supply of money is lagged behind by the increase in the production.

Cost Push Inflation –

• This type of Inflation is created and sustained by the increase in the production cost that is independent of state of demand (Trade unions generally bargain for the higher wages and it leads to inflation).

Stagflation –

• In this Inflation, there is a fall in output of an Industry and its employment levels. The entrepreneurs raise the price to handle the margin of the profit due to several pressures.
• The raised prices results a declination in output and capital investment. The general hike of price and decreased output and investment cause Stagflation.

Open Inflation –

• In this Inflation the costs rise as the result of economic trends of the services and spending products.

Suppressed Inflation –

• If the existing inflation is disguised by the price control or any other interference of the Government in the economy like subsidies, this inflation occurs.
• This suppression is not permanent as none of these governmental measures fully contain the accelerating inflation in long run. It is also called as Repressed Inflation.

Galloping Inflation –

• This is a very rapid inflation that is impossible to decrease.

Creeping Inflation –

• It is known as the circumstance in which the inflation of a country increases gradually and continually over the time.
• Though this increase is small relatively in short-term, it continues over the time the effect would become more.

Hyper Inflation –

• It is mainly caused by the excessive deficit spending that is financed by printing more currency notes by the government.
• Social breakdown due to political reason is also a cause for hyperinflation.

Measurement and Control of Inflation 

• Inflation is a parasite for an economy in which the general level prices of goods and services increases over a certain time.
• The word “Inflation” refers to the price hike which is measured against the standard purchasing power level.
• It reflects the erosion of the purchasing power of the money.

Measurement of the Inflation-

• The percentage of the change of Price index is known as the Inflation Rate. The Inflation Rate can be measured by two indexes.

Wholesale Price Index (WPI) –

• It is the indicator which is designed to calculate the changes in the price levels of commodities which flows into the intermediaries of wholesale trade.
• This WPI index is used to guide the economic analysis and policy formulation.
• It is the base for the adjustment of price in the projects and business contracts.
• It is also used as the additional source of the information to compare on international font.

Consumer Price Index (CPI) -

• It is related to a particular group in a nation.
• The cost of living of a particular group of people is determined by it.
• It is based on the changes of the retail prices of services and goods. 
• The consumer spends money on these services and goods on the basis of their income.
• There are several CPIs each of which tracks the change in retail prices for different consumer sets.

Measures to Control the Inflation-
Fiscal Policy –

• The Fiscal Policy denotes the ways of Government to raise the revenue and spend it in proper places.
• If the overall revenue collected by the Government from various sources through taxation, charge, surpluses from the PSUs is less than the amount spent for buying services and goods for the welfare and development of armed force, civil and other developmental activities, a Fiscal Deficit rises in the budget.
• The Government can control the Inflation by reducing the Fiscal Deficits.
• The Fiscal Deficits can be managed by the reducing the wasteful and unnecessary expenditure and increasing Direct Taxes. 
• It can also be minimized by putting ban on export of essential goods in an indirect way.
• In India, the Fiscal Deficits can be managed by reducing the non planned expenditure in defense and general administration and subsidies on food, exports and fertilizers.

Monetary Policy-

• It refers to suitable policy adoption regarding the available credit and interest rate.
• It is an important way to reduce the aggregate demand for controlling Inflation.
• It can tighten the credit through Interest Rates. The higher interest rate leads to higher borrowing cost from the Banks (Increase in Bank Rate). This phenomenon is also known as the Dear Money Policy.
• The Inflation can be controlled by raising the CRR (Cash Reserve Ratio). The increasing CRR can reduce the capacity of lending of Commercial Banks. Thus flow of money towards public also is reduced.

Open Market Operations-

• The Open Market Operations refers to the purchase and sell of Government Bonds and Securities by Central Bank.
• To control Inflation the Central Bank can sell the Government Securities through banks to public. It reduces the capacity of credit creation of Commercial Banks.

Supply Management –

• To control Inflation the Government can increase the import of essential goods like edible oils, food grains etc. to ease the availability these things in market by reducing custom duties on those things.

Income Policy-

• The Government can also control Inflation by freezing the wages of the employees.

Most Trending Topics (For IBPS PO Descriptive): RBI Task Force - Public Credit Registry