Different Types of Inflation and Their Impacts
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Presented by
Prof. Ishfaq Ahmad Bhat
Department of Economics
Govt. P.G Co
ll
ege Rajouri
1.
Introduction
2.
Types of Inflation
3.
Causes of inflation
4.
Effects of Inflation
5.
Inflation control Measures
Inflation
is a sustained increase in the
general price level
of
goods and services in an economy over a period of time. When
the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation reflects a reduction
in the
purchasing power
per unit of money – a loss of
real
value
in the medium of exchange and unit of account within
the economy.
1.
Creeping Inflation
Creeping or mild inflation is when prices rise 3 percent a year or
less. According to the
Federal Reserve
, when prices increase 2 percent or less it
benefits
economic growth
. This kind of mild inflation makes consumers expect that
prices will keep going up. That boosts
demand
.
2.Walking Inflation
This type of strong, or pernicious, inflation is between 3- 10 percent
a year It is harmful to the economy because it heats up economic growth too fast.
People start to buy more than they need, just to avoid tomorrow's much higher
prices .
3.
Galloping Inflation
When inflation rises to 10 percent or more, it wreaks absolute
havoc on the economy. Money loses value so fast that business and employee income
can't keep up with costs and prices.
4.
Hyperinflation
Hyperinflation
is when prices skyrocket more than 50 percent a month.
It is very rare. In fact, most examples of hyperinflation have occurred only when
governments printed money to pay for wars. Examples of hyperinflation
include
Germany
in the 1920s, Zimbabwe in the 2000s, and Venezuela in the 2010s
Demand-Pull Inflation
Demand-pull inflation results from strong consumer
demand. Many individuals purchasing the same good will cause the price to
increase, and when such an event happens to a whole economy for all types
of goods, it is called demand-pull inflation. Demand-pull inflation is used
by
Keynesian economics
to describe what happens when price levels rise
because of an imbalance in the
aggregate supply
and demand. When the
aggregate demand in an economy strongly outweighs the aggregate supply,
prices go up. Economists describe demand-pull inflation as a result of too
many dollars chasing too few goods.
Cost-Push Inflation
Cost-push inflation is a situation in which the
overall
price levels
go up (inflation) due to increases in the cost of wages
and
raw materials
.Cost-push inflation develops because the higher costs of
production factors decreases in
aggregate supply
(the amount of total
production) in the economy. Since there are fewer goods being produced
(supply weakens) and demand for these goods remains consistent, the prices
of finished goods increase (inflation).
Income redistribution
:
One risk of higher inflation is that it has a
regressive
effect
on lower-income families and older people in society. This happen when
prices for food and domestic utilities such as water and heating rises at a rapid
rate
Risks of wage inflation
:
High inflation can lead to an increase in pay claims
as people look to protect their real incomes. This can lead to a rise in unit
labour costs and lower profits for businesses
Business uncertainty
:
High and volatile inflation is not good for business
confidence partly because they cannot be sure of what their costs and prices
are likely to be. This uncertainty might lead to a lower level of capital
investment spending
Falling real incomes
:
With millions of people facing a cut in their wages or at
best a pay freeze, rising inflation leads to a fall in real incomes.
Income redistribution
:
One risk of higher inflation is that it has a
regressive
effect
on lower-income families and older people in society.
Monetary policy
One of the important monetary measures is monetary
policy. The central bank of the country adopts a number of methods to
control the quantity and quality of credit. For this purpose, it raises the bank
rates, sells securities in the open market, raises the reserve ratio, and adopts a
number of selective credit control measures, such as raising margin
requirements and regulating consumer credit.
one of the monetary measures
is to demonetise currency of higher denominations. Such a measures is
usually adopted when there is abundance of black money in the country
.
Fiscal Measures
Monetary policy alone is incapable of controlling inflation.
It should, therefore, be supplemented by fiscal measures. Fiscal measures are
highly effective for controlling government expenditure, personal
consumption expenditure, and private and public investment.
a) Reduction in Unnecessary Expenditure
(b) Increase in Taxes
(c) Increase in Savings
Inflation is a sustained increase in the general price level of goods and services in an economy over time, leading to a decrease in purchasing power. This article discusses the various types of inflation - from creeping and walking to galloping and hyperinflation - along with their causes and effects. It delves into demand-pull and cost-push inflation, explaining how each type impacts the economy. Additionally, income redistribution due to inflation is highlighted. Overall, it provides a comprehensive overview of the complex phenomenon of inflation and its implications.
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Presentation Transcript
Presented by Prof. Ishfaq Ahmad Bhat Department of Economics Govt. P.G College Rajouri
Introduction Types of Inflation Causes of inflation Effects of Inflation Inflation control Measures 1. 2. 3. 4. 5.
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money a loss of real value in the medium of exchange and unit of account within the economy.
1. Creeping Inflation Creeping or mild inflation is when prices rise 3 percent a year or less. According to the Federal Reserve, when prices increase 2 percent or less it benefits economic growth. This kind of mild inflation makes consumers expect that prices will keep going up. That boosts demand. 2.Walking Inflation This type of strong, or pernicious, inflation is between 3- 10 percent a year It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow's much higher prices . 3. Galloping Inflation When inflation rises to 10 percent or more, it wreaks havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. absolute 4. Hyperinflation Hyperinflation is when prices skyrocket more than 50 percent a month. It is very rare. In fact, most examples of hyperinflation have occurred only when governments printed money to pay include Germany in the 1920s, Zimbabwe in the 2000s, and Venezuela in the 2010s for wars. Examples of hyperinflation
Demand-Pull Inflation demand. Many individuals purchasing the same good will cause the price to increase, and when such an event happens to a whole economy for all types of goods, it is called demand-pull inflation. Demand-pull inflation is used by Keynesian economics to describe what happens when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. Economists describe demand-pull inflation as a result of too many dollars chasing too few goods. Demand-pull inflation results from strong consumer Cost-Push Inflation overall price levels go up (inflation) due to increases in the cost of wages and raw materials.Cost-push inflation develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy. Since there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase (inflation). Cost-push inflation is a situation in which the
Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes. Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society.
Monetary policy One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. one of the monetary measures is to demonetise currency of higher denominations. Such a measures is usually adopted when there is abundance of black money in the country. Fiscal Measures Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. a) Reduction in Unnecessary Expenditure (b) Increase in Taxes (c) Increase in Savings
