What is Inflation and What are the Types of Inflation?

Ever since the invention of money, there has been debates about inflation. Many of us see inflation as on going increase in prices but in fact, increase of prices is one of the effects of inflation.

30 June 2022 ・ Author: Speaker Agency

What is Inflation?

Basically, inflation is the decline of purchasing power of a currency due to continuous increase of the prices of goods and services. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. The indicator of inflation is not the increase of prices in certain goods. We can talk about inflation when there is a continuous increase in the prices of goods and services altogether.

Decrease in inflation doesn’t mean to say that purchasing power will increase. Inflation aims to measure the overall impact of price changes for a diversified set of products and services, and allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time.

How is Inflation Measured?

Surely you have seen the percentages and percentage values in news programmes or financial news clips about the measuring of inflation. Inflation is measured in a variety of ways depending upon the types of goods and services considered and is the opposite of deflation which indicates a general decline occurring in prices for goods and services. Let us take a look at this example to make sense of these percentages.

Types of Inflation

Every country has an economy and economic power unique to itself and each country is different from one another in these terms. Thus, inflation is experienced differently in every country. Types of inflation are categorized in two seperate ways depending on the gravity and the grounds of it.

Moderate inflation, high inflation and hyperinflation are the types of inflation in terms of gravity. Demand-pull inflation, cost-push inflation and built-in inflation are the types of inflation in terms of ground.

  • Moderate Inflation

Moderate inflation is the type of inflation with less damaging effects as the name suggests and it means the increse in prices is somewhat reasonable.

  • High Inflation

High inflation is when the prices of goods and services are increasing rapidly and the purchasing power is decreasing continuously. In an economy where there is high inflation, the currency of the country also loses value rapidly.

  • Hyperinflation

Although as consumers we may hate rising prices, many economists believe a moderate degree of inflation is healthy for a nation’s economy. Increases in inflation significantly beyond a reasonable range can lead to fears of possible hyperinflation, a devastating scenario in which inflation rises rapidly out of control and the currency of the nation loses value. In some cases, countries end up changing their currency.

  • Demand-pull Inflation

Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises. For instance, in an environment where 10 people consume 10 loaves of bread daily, the production of bread goes down to 8. This means the price of bread will increase and this an example for demand-pull inflation.

  • Cost-push Inflation

Cost-push inflation results from general increases in the costs of the factors of production. When the cost of these factors rise, producers wishing to retain their profit margins must increase the price of their goods and services. When these production costs rise on an economy-wide level, it can lead to increased consumer prices throughout the whole economy, as producers pass on their increased costs to consumers. Consumer prices, in effect, are thus pushed up by production costs.

  • Built-in Inflation

Built-In inflation occurs when the prices of commodities in a nation are increasing and then labor demands higher wages to keep up with or maintain their standards of living due to the higher costs of finished products. Rise in the general population or migration make demand spike and the production is nowhere near to meet the demand, this is one of the reasons for built-in inflation.

Ramifications of Inflation

We must mention the ramifications of inflation where it is being experinced. As the purchasing power decreases some structural changes are likely to be observed. Also, we might see changes in people’s behaviour. Let us take a look at these possibilities.

  • Individuals in the system lose their purchasing power which might cause serious social unrest. Working class and civil servants are the ones who are severely affected by inflation because it is very difficult to increase salaries in accordance with the inflation rate.
  • People who have debt in the currency of the country will benefit from inflation as the loss in value allow them to pay their debts relatively easier.
  • People lose interest in having savings accounts and saving money because it becomes more reasonable to invest in goods or real estate as the inflation rate rises. This of course, will result in demand. When the demand increases the prices also rise.
  • Fair income distribution becomes a much harder matter to resolve.

Be prepared

Financial investments are risky in countries where there is high inflation and economic crisis. It’s critical to have updated information and learn from the experts about what to do and what not to do in an environment of risk. Please contact Speaker Agency and meet our Global Economy Speakers; Dr. Tomas Sedlacek, Harry G. Broadman Dr. Parag Khanna, Prof. Ozgur Demirtas who are also best financial advisors.

Word Cloud

  • Purchasing Power

  • Goods and Services

  • Increased Demand

  • Priced Rise

  • Higher Pricing

  • Exchange Rates

  • Foreign Currencies

  • Cost of Living

  • Raised Interest Rates