Causes and types of inflation.

Inflation – a general increase in the price level of goods and services. Unexpected inflation tends to be detrimental to security prices, primarily because it forces interest rates higher. A point to keep in mind is that a certain amount of inflation is already embodied in security prices.

The basic causes of inflation were covered at AS level. This note considers the demand and supply-side courses in more detail including the impact of changes in the exchange rate and the prices of goods and services in the international economy.

Types of inflation on the basis of coverage and scope point of view-

Comprehensive Inflation: When the prices of all commodities rise throughout the economy it is known as Comprehensive Inflation. Another name for comprehensive inflation is Economy Wide Inflation.

Sporadic Inflation: When prices of only few commodities in few regions (areas) rise, it is known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon (winds bringing seasonal rains in India).

Types of inflation on the basis of time (period) of occurrence:-

War-Time Inflation: Inflation that takes place during the period of a war-like situation is known as War-Time inflation. During a war, scare productive resources are all diverted and prioritized to produce military goods and equipments. This overall result in very limited supply or extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of basic goods slow down and can no longer meet the soaring demand from people. Consequently, prices of essential goods keep on rising in the market resulting in War-Time Inflation.

Post-War Inflation: Inflation that takes place soon after a war is known as Post-War Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war.

Peace-Time Inflation: When prices rise during a normal period of peace, it is known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of a long gestation (development) period.

Types of inflation on basis of Government's reaction or its degree of control:

Open Inflation: When government does not attempt to restrict inflation, it is known as Open Inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs.

Suppressed Inflation: When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.

Types of inflation on the basis of rising prices or rate of inflation:-

Creeping Inflation: When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than 3% per annum (year), it is called Creeping Inflation.

Chronic Inflation: If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation.

Walking Inflation: When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation.

Moderate Inflation: Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem.

Running Inflation: A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.

Galloping Inflation: According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation. India has been witnessing galloping inflation since the second five year plan period.

Hyperinflation: Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe 's regime.

Types of inflation on the basis of different causes:-

Deficit Inflation: Deficit inflation takes place due to deficit financing.

Credit Inflation: Credit inflation takes place due to excessive bank credit or money supply in the economy.

Scarcity Inflation: Scarcity inflation occurs due to hoarding. Hoarding is an excess accumulation of basic commodities by unscrupulous traders and black marketers. It is practiced to create an artificial shortage of essential goods like food grains, kerosene, etc. with an intension to sell them only at higher prices to make huge profits during scarcity inflation. Though hoarding is an unfair trade practice and a punishable criminal offence still some crooked merchants often get themselves engaged in it.

Profit Inflation: When entrepreneurs are interested in boosting their profit margins, prices rise.

Pricing Power Inflation: It is often referred as administered price inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. It does not occur during a financial crisis and economic depression, and is not seen when there is a downturn in the economy. As Oligopolies have the ability to set prices of their goods and services it is also called as Oligopolistic Inflation.

Tax Inflation: Due to rise in indirect taxes, sellers charge high price to the consumers.

Wage Inflation: If the rise in wages in not accompanied by a rise in output, prices rise.

Build-In Inflation: Vicious cycle of Build-in inflation is induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation. Employers and organizations raise the prices of their respective goods and services in anticipation of the workers or employees' demands. This overall builds a vicious cycle of rising wages followed by an increase in general prices of commodities. This cycle, if continues, keeps on accumulating inflation at each round turn and thereby results into what is called as Build-in inflation.

Development Inflation: During the process of development of economy, incomes increases, causing an increase in demand and rise in prices.

Fiscal Inflation: It occurs due to excess government expenditure or spending when there is a budget deficit.

Population Inflation: Prices rise due to a rapid increase in population.

Foreign Trade Induced Inflation: It is divided into two categories, viz., (a) Export-Boom Inflation, and (b) Import Price-Hike Inflation.

Export-Boom Inflation: Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country).

Import Price-Hike Inflation. If a country imports goods from a foreign country, and the prices of imported goods increases due to inflation abroad, then the prices of domestic products using imported goods also rises. This is known as Import Price-Hike Inflation. For e.g. India imports oil from Iran at $100 per barrel. Oil prices in the international market suddenly increases to $150 per barrel. Now India to continue its oil imports from Iran has to pay $50 more per barrel to get the same amount of crude oil. When the imported expensive oil reaches India, the Indian consumers also have to pay more and bear the economic burden. Manufacturing and transportation costs also increase due to hike in oil prices. This, consequently, results in a rise in the prices of domestic goods being manufactured and transported. It is the end-consumer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international market fall down then the import price-hike inflation also slows down, and vice-versa.

Sectoral Inflation. It occurs when there is a rise in the prices of goods and services produced by certain sector of the industries. For instance, if prices of crude oil increases then it will also affect all other sectors (like aviation, road transportation, etc.) which are directly related to the oil industry. For e.g. If oil prices are hiked, air ticket fares and road transportation cost will increase.

Demand-Pull Inflation: Inflation which arises due to various factors like rising income, exploding population, etc., leads to aggregate demand and exceeds aggregate supply, and tends to raise prices of goods and services. This is known as Demand-Pull or Excess Demand Inflation.

Cost-Push Inflation: When prices rise due to growing cost of production of goods and services, it is known as Cost-Push (Supply-side) Inflation. For e.g. If wages of workers are raised then the unit cost of production also increases. As a result, the prices of end-products or end-services being produced and supplied are consequently hiked.

Types of inflation on the basis of expectation or predictability:-

Anticipated Inflation: If the rate of inflation corresponds to what the majority of people are expecting or predicting, then is called anticipated Inflation.

Unanticipated Inflation: If the rate of inflation corresponds to what the majority of people are not expecting or predicting, then is called unanticipated Inflation. It is also referred as unexpected Inflation. [2]

On the basis of speed, inflation can be classified as (a) creeping inflation, (b) walking inflation, (c) running inflation, and (d) galloping or hyperinflation.

1. Creeping Inflation: It is the mildest form of inflation. It is generally regarded as conducive to economic development because it keeps the economy away from stagnation. But, some economists consider creeping inflation as potentially dangerous. They are of the view that, if not properly controlled in time, creeping inflation may assume alarming proportions. Under creep­ing inflation, prices rise about 2 per cent annually.

2. Walking Inflation occurs when the price rise becomes more marked as compared to creeping inflation. Under walking inflation, prices rise approximately by 5 per cent annually.

3. Running Inflation: under running inflation, the prices increase at a still faster rate. The price rise may be about 10 per cent per annum.

4. Galloping or Hyper-Inflation: this is the last stage of inflation which starts after the level of full employment is reached. Keynes considers this type of inflation as the true inflation. Under the galloping inflation, the prices rise every moment and there is no upper limit to the price rise. [3]

Scheme 1.Types of inflation

Source: Made by author of coursework.

When most of us think of inflation, we see it as a minor annoyance that has caused prices to rise, slowly, over the 20th century. However, inflation can move much faster than what most in the western world are used to. In fact, inflation can rise so fast that it can literally cripple an economy and bring countries to their knees. To show some of the worst examples of inflation over the past 100 years or so, here is a brief list for you to enjoy and reflect upon. When most people think of bad inflation, Zimbabwe is usually the country that comes to mind. In the 2000s, the country made regular news for the incredible speed in which the country’s currency lost value.

Dating back to 1980, the Zimbabwe Dollar was worth around $1.25 in U.S. Currency.

However, the collapse of the economy resulted in rampant inflation. Many consider the reason for the hyperinflation to be Robert Mugabe’s decision to take land from white farmers and give it to black farmers, which caused food production and the revenues from its export, to plummet. In 2004, inflation in the country reached 624 percent, and by 2006 it had risen to 1,730 percent. By June 2007, the inflation in Zimbabwe rose to 11,000 percent year-to-year, to cope with the inflation the Bank of Zimbabwe issued checks valued at 100 Million and 200 Million. Ten days later, more checks were issued for 500 million Zimbabwe Dollars, which equaled $2.5 U.S. Dollars.

This continued to the point when checks worth $100 billion were being issued and the estimates of inflation for the country reaching 9 million percent, which effectively made the value of the Zimbabwe currency $688 Billion per $1 U.S. Dollar.

Apparently, inflation reached its max by some estimates in November 2008 with a rate of 89,700,000,000,000,000,000,000 percent. Eventually, the currency was abandoned and only foreign currencies were used.

Europe, while relatively stable now with inflation, went through some very difficult periods with inflation.Germany had its worth inflation in 1923, following the First World War. In 1922, the highest denomination possible in Germany currency was 50,000 Marks. However, by 1923, denominations of 100,000,000,000,000 Marks were being issued, with the exchange rate of December 1923 being 4,200,000,000,000 Marks to $1 U.S.

The inflation rate in the country eventually reached an astounding 3.25 x 106 percent per month, which meant that the prices were doubling every two days. People were literally taking wheelbarrows full of money to buy one loaf of bread.

Following the Second World War, Hungary went through its worst inflation from 1945 to July of 1946. In 1944, the highest denomination of the Pengo was 1,000. By the end of 1945, the new highest currency was 10,000,000 pengo and by 1946 it was 100,000,000,000,000,000,000 pengo. To help remedy the inflation, two different currencies were issued as inflation was reaching 1.3 x 1,016 percent per month, resulting in the price doubling on things every 15 hours.

Poland suffered through hyperinflation following the fall of the Soviet Union, from 1989 to 1991. In 1989, the highest denomination of the zlotych was 200,000 by 1992 it had reached 2,000,000. By the end of August, 1992, the exchange rate was 19,600 zlotych for every one $1 US.

In the Ukraine, after the Soviet Ruble was replaced with the karbovancts, the highest denomination was 1,000 karbovantsiv. By 1995,the highest denomination was 1,000,000. The exchange rate eventually hit 1,400 per month. Currently, the Ukraine holds the record for the most inflation in one year, set in 1993.

In recent years, South America has gone through some immense inflation as the developing countries ride the roller coaster to becoming developed. Here are some of the worst examples of South American inflation.

Argentina went through its worst inflation from 1975 to 1991. In 1975, the highest denomination was 1,000 peso, but by 1976 that rose to 5,000. Three years later it was 10,000 pesos and by 1981 it was 1,000,000 pesos. Currency reform resulted in the new 1 Peso Argentina being worth 10,000 pesos in 1985. By 1992, once the economic crisis passed, 1 1992 Peso was worth 100,000,000,000 pre-1983 pesos.

Bolivia went through its worst inflation in the 1980s, from 1984 to 1986, with the highest denomination being 1,000 pesos Bolivians in 1984. By the end of 1985, the highest denomination was 10,000,000 pesos Bolivians. This put the value of the currency at 1,000,000 pesos for every 55 cents in American currency.

Brazil experienced the worst inflation in its history from 1986 to 1994 when inflation rose dramatically. Total inflation in the country reached a high of 2,075.8 percent by the end of the crisis.

China has had examples of hyperinflation dating back before the 20th century, but the Republic of China experienced its worst inflation between 1948 and 1949. In 1947, the highest denomination was 50,000 Yuan, but by the middle of 1948 that had risen to 180,000,000 Yuan. Currency reform that year resulted in the gold Yuan replacing the old Yuan, with an exchange rate of 1 gold Yuan equaling 3,000,000 Yuan. However, the end of 1948, a denomination of 10,000,000 gold Yuan was being issued, and bin 1949 introduced the silver Yuan with 1 silver Yuan equaling 500,000,000 gold Yuan.

The Philippines went through its own hyperinflation period when the Japanese occupied it during the Second World War. The Japanese issued its own money, outlawing other currency as guerilla money. The fiat currency issued by the Japanese government became utterly worthless however, and many people would bring suitcases full of money to buy cheap items.

Depending on the length, there are chronic and cyclical inflation.

Chronic inflation- Occurs when a country experiences unusually high inflation, usually over ten percent per year, for an extended number of years.

In some cases this is caused by the continually expansion of currency which subsequently reduces monetary values [4]

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