To discuss Types of inflation, firstly we should know what inflation is? Inflation is basically the quick movement in the general pricing level. When prices of the products go up with every passing day and the income of the people started going down, then this situation leads to inflation.
Sometimes increase in the demands of the products also lead to inflation, because there are high demand and low supply in the market, which leads to inflation in the market. An increase in demand for the products is not only the single reason of inflation, there are a lot more causes of inflation, but let’s discuss the types of inflation first.
Different Types of Inflation
There are five types of inflation which are discussed as under:-
- Mild Inflation
In these types of inflation, there is a favorable growth in the economy and According to Keynes, when the investment goes up, the level of national income decreases, this indicates that the cost of production will also go up. This is the growth process of an economy.
- Cost-Push and Demand Full Inflation
Cost-Push inflation is a situation where a rise in the general price level is initiated and sustained by rising costs, which indicates the increase in prices. Demand Full inflation may be defined as a situation where the aggregate demand persistently exceeds the available supply of output at current prices which once again increases the general pricing levels. Cost-push and demand-pull support each other and the phenomenon leads to a wage-price spiral, and if this is uncontrolled, it would be disastrous for the economy.
- Suppressed Inflation
These types of inflation are only temporary measures to preventing inflation. The government introduces price control on the commodities, and the fixes the quantity of supply of basic essential e.g. Agricultural product, etc.
- Hidden Inflation
This is rather a dictatorial measure of price control where due to government policies, entrepreneurs sell the commodities at the required price fixed by the government. However, the entrepreneur still gains the upper hand by lowering down the quality of the product which cannot possibly be visualized, they would have a lower cost f production and thus be able to sell at the required level and reaps substantial profit.
It is another type of inflation, which is consists of two parts i.e. stagnation of the economy and inflation in the economy. Since they take place simultaneously, this process is known as stagflation. Stagflation is a situation where both unemployment and the rate of inflation are high as compared to the accepted standard.
How to Control Inflation
The following measures are taken to control inflation in the country while seeing the root causes of inflation.
- Money Supply
The control over the money supply is an effective method to control inflation. The printing of new notes must be stopped.
- Compulsory Saving
The government may start schemes of compulsory savings to take from each person some portion of his earnings. The purpose is to decrease the purchasing power of each person.
- Credit Control
The central bank can control credit in order to control inflation. Money is needed to do business. The limits of credit may be fixed by the government from time to time. The monetary authority should act according to the credit ceiling approved by the state.
- Monetary Reforms
The government can exchange old notes for new ones and large parts may be blocked. The same rule can be applied to bank accounts. The people cannot take loans and they are completed to spend money out of current income.
- Taxation Increase
The increase in taxes means part of the income of people will be transferred to the government. The purchasing power of general public will decrease. There will be a low demand for goods and services.
- Public Debt
The government may arrange public debt during inflation. The central bank can arrange loans from banks and the general public. The borrowing on the part of the government reduces the income of people.
- Surplus Budget
The government can prepare a surplus budget during inflation. The surplus budget means the income is more as compared to expenses. Taxes are collected from the general public for the purpose of decreasing general public income. The surplus budget is a step to control inflation.
- Tariff Decrease
The decrease in tariff on importers encourages the importers to buy goods in large quantities from other countries. The low rate permits import of goods at a low rate.
- Check on Exports
The surplus goods may be exported, but the items which are short at the home market should not be exported at any cost. The maintenance of a stable price level is a challenge for the government.
- Over Valuation
The government can overvalue its money in terms of currencies of other countries. The holders of overvalued money can buy more goods and services than before.
- Control Over Investment
The investment can be controlled by means of a license. The government can decide about the areas of investment. The developed sector may be discouraged.
- Price Control
The government can introduce the price control of various commodities. It is a tool in the hands of the government to control inflation.
The rationing of goods is another measure to control inflation. The supply of some items may be short. The demand for goods is high. The government can fix the quota of goods available to the general public.
- Increase in Production
The increase in the production of goods is helpful to increases the supply of things in the market. The increases in production can regulate the price level. The installation of new machines and overhauling old machines can help to improve the supply of goods.
- Wages Control
The government can control the wages of employees in the public and private sectors. The purchasing power of people is increased. It helps to regulate the demand for goods and services.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
Love my efforts? Don't forget to share this blog.