Inflation

Inflation is defined as a sustained increase in the general level of prices for goods and services in a country, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every rupee you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.

The value of a rupee (or any unit of money) is expressed in terms of its purchasing power, which is the amount of real, tangible goods or actual services that money can buy at a moment in time. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a Rs.1 chocolate will cost Rs.1.02 in a year. After inflation, your rupee does not go as far as it did in the past.

Features Of Inflation

Following are the main features of inflation:

1. Inflation is always accompanied by a rise in the price level. It is a process of uninterrupted increase in prices.

2. Inflation is a monetary phenomenon and it is generally caused by excessive money supply.

3. Inflation is essentially an economic phenomenon as it originates in the economic system and is the result of action and interaction of economic forces.

4. Inflation is a dynamic process as observed over the long period.

5. A cyclical movement of prices is not inflation.

6. Pure inflation starts after full employment.

7. Inflation may be demand-pull or cost-push.

Types Of Inflation

1. Creeping Inflation: This is also known as mild inflation or moderate inflation. This type of inflation occurs when the price level persistently rises over a period of time at a mild rate. When the rate of inflation is less than 10 per cent annually, or it is a single digit inflation rate, it is considered to be a moderate inflation.

2. Galloping Inflation: If mild inflation is not checked and if it is uncontrollable, it may assume the character of galloping inflation. Inflation in the double or triple digit range of 20, 100 or 200 percent a year is called galloping inflation. Many Latin American countries such as Argentina, Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s.

3. Hyperinflation: It is a stage of very high rate of inflation. While economies seem to survive under galloping inflation, a third and deadly strain takes hold when the cancer of hyperinflation strikes. Nothing good can be said about a market economy in which prices are rising a million or even a trillion percent per year. Hyperinflation occurs when the prices go out of control and the monetary authorities are unable to impose any check on it. Germany had witnessed hyperinflation in the 1920s.

4. Stagflation: It is an economic situation in which unemployment increases along with rising inflation causing demand to remain stagnant in a given period. In fact, it is an indication of an inefficient market, as traditionally, there is an inverse relationship between unemployment rates and inflationary pressures. Stagflation was witnessed by developed countries in the 1970s, when world oil prices rose dramatically.

5. Deflation: Deflation is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money. Japan suffered from deflation for almost a decade in the 1990s.