Download Inflation – Different Types and Impacts

Banking & Finance Abbreviations
Inflation – Different Types and Impacts
Inflation is nothing but the more price we pay for goods. It is the persistent rise of all goods and
services over a period of time. There are several factors that influences inflation in India. The
major factors to be taken into account is the population, unbalanced economic growth, demand
for more money and increased taxes. On the flip side it has adverse effects on consumers.
The day to day goods are sold considerably at a higher rate which makes difficult for the
consumers to afford their basic needs. Hence the need for money increases which is one of the
major cause.
There is huge money gap which could be the potential factor for increased price and inflation in
India. Increase in enormous expenditure can cause inflammatory gap at current prices.
The rate of inflation is measured on the basis of price indices which are of two kinds—
Wholesale
Price Index (WPI) and Consumer Price Index (CPI).
Types of Inflation
A. Demand – Pull Inflation
When there is a mis-match between demand and supply, it will eventually pull up the prices.
Here we have two cases. In first case, the demand increases over the same level of supply. In
second case, the supply decreases with the same level of demand. In both cases the situation of
demand-pull inflation arise.
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B. Cost – Push Inflation
An increase in factor input costs pushes up prices. In general the factors that could contribute to
Cost-Push inflation are increases in corporate taxes, rising wages, and rising raw materials cost.
C. Low Inflation
Low inflation takes place in a longer period and the range of increase is usually in ‘single digit’.
Such inflation has also been called as ‘creeping inflation’.
D. Deflation
Deflation is the exact opposite of inflation. The persistent fall in the prices of all goods and
services over a period of time is called deflation. When deflation occurs it is possible to buy more
amount of goods with the same amount of money. Deflation has often had the side effect of
increasing unemployment in an economy, since the process often leads to a lower level of
demand in the economy.
E. Stagflation
Stagflation is a situation in an economy where inflation and unemployment both are at higher
levels. Stagflation occurs when the economy isn’t growing but prices are going up. Stagflation is
basically a combination of high inflation and low growth.
F. Galloping Inflation
This is a “very high inflation” running in the range of double-digit or triple digit (i.e. 20%, 100%
or 200% a year). The Russian economy showed such inflation after the disintegration of the exUSSR in the late 1980s.
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G. Hyperinflation
This form of inflation is ‘large and accelerating’ which might have the annual rates in million
or even trillion. In such inflation not only range of increase is very large but the increase takes
place in a very short span of time, prices shoot up overnight. This hasn’t happened in the U.S.
since the Civil War, occurred in Germany before World War II, and in Zimbabwe in the
2000s. Such an inflation quickly leads to a complete loss of confidence in the domestic currency
and people start opting for other forms of money.
H. Skewflation
It is an un-usual inflation, where there is an inflation in one particular sector for a particular
period of time, while the other sector is experiencing no changes at all or facing deflation.
Impacts of Inflation

It slow down the economic growth rate.

Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and
borrowers benefit out of inflation.

Prices goes up, that mean you pay more money for the same product which you got it
lesser earlier.

With the rise in inflation, lending institutions feel the pressure of higher lending.

Investment in the economy is boosted by the inflation (in the short-run).
The standard of living declines.

The export segment of the economy benefits due to inflation.

Inflation gives an economy the advantage of lower imports and import-substitution as
foreign goods become costlier.
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