Inflation: Definition and Types

Definition

Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined as ‘a persistent and appreciable rise in the general level or aver­age of prices’. In other words, It is a state of rising prices, but not high prices.

  • According to Coulbrun___”too much money chasing to few goods”.
  • Crowther defines, “It is a state in which the value of money is falling”.
  • It is a situation of rising prices in the economy.
  • It is a sustained increase in the general price level in an economy. It means an increase in the cost of living as the price of goods and services rise.

It affects economies in various positive and negatively. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation.

Inflation

Types of Inflation

1. Demand-pull inflation: It will typically occur when the economy is growing faster than the long-run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.

2. Cost-push inflation: It occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. It is determined by supply-side factors, such as higher wages and higher oil prices. Cost-push inflation is different to demand-pull inflation which occurs when aggregate demand grows faster than aggregate supply. It can lead to lower economic growth and often causes a fall in living standards, though it often proves to be temporary.

4. Imported Inflation: A depreciation in the exchange rate will make imports more expensive. Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will also make exports more competitive so will increase demand.