1. Demand – Pull Inflation : It is loosely described as “too much money chasing too
few goods”. This refers to the situation where general price level rises because
the demand for goods and services exceeds the supply available at the existing
prices.
Creeping or Persistent inflation : Since the end of world War II, i.e. since 1945,
there has been a tendency for prices and wages to push one another upwards. This
situation has been described as creeping or persistent inflation.
Runaway or Galloping or Hyper – Inflation
This is a serious type of inflation. For example, it was experienced in Germany
after World War I and in Hungary and China after World War II. In this situation,
prices rise to a very great extent at high speed and high prices have to be paid even
for cheap things. And money becomes quite worthless and new currency has to be
introduced. This situation is known as galloping inflation or hyper-inflation.
2. Cost – Push Inflation
Cost – push inflation is induced by rising costs, including wages, so that rising
wages and other costs push up prices. We can also speak of wage inflation or price
inflation when we mean increase in wages or prices.
Bottleneck Inflation : This refers to inflation that results from shortages, imbalances
and rising marginal costs as full employment output is approached.
Profit – Push Inflation - Just as trade unions manage to push up wages,
oligopolists and monopolists will raise prices more than enough to cover increase in
costs with the aim of making monopoly profits.
Generally during war and in the post- war period, there will be inflation. This
is so because during war, the incomes of people increase. But there will be shortage
of goods and there may be rationing, control and things like that. So during the post -
war years, people who have been forced to save money will spend. That is, demand
for all sorts of goods will increase during that period but supply will not increase so
fast as that. This leads to inflation. Inflation occurs during war because the one great
aim at that time is that of winning the war. Since modern wars are so expensive,
the Government has to depend upon created money to finance war. This leads to
inflation. And inflation breeds inflation. It means that inflation leads to inflation. During
a period of inflation, prices will be high. Since prices are high, workers will demand
high wages. High wages result in high costs. High costs in turn lead to high prices.
Thus it forms a vicious circle. “Wages force up prices ; prices force up wages”. This
is the inflationary spiral. “Deficit financing” is another cause of inflation. This applies
particularly to underdeveloped countries with planned economies. Inflationary trends
can be noticed also during the boom period of a trade cycle.
Since inflation has many evils, every government tries to check it. Inflation
has destroyed many economies. For example the inflation that took place in 1923 in
Germany destroyed her economic system. Inflation can be checked by some or all of
the following measures.
(1) Increased taxation (2) By reducing government expenditure on capital projects.
(In India, this measure has been suggested to check inflation. Many capital
projects proposed in our Third Five Year Plan were either suspended or dropped
completely. (3) Restrictions on imports. (4)Rationing and (5) Price controls.
Sometimes a “wage freeze’ is recommended to check inflation. That is, trade
unions will be requested not to ask for an increase in wages during a given
period. The success of the above measures in tackling inflation depends upon
the efficiency of the government in implementing the measures.
few goods”. This refers to the situation where general price level rises because
the demand for goods and services exceeds the supply available at the existing
prices.
Creeping or Persistent inflation : Since the end of world War II, i.e. since 1945,
there has been a tendency for prices and wages to push one another upwards. This
situation has been described as creeping or persistent inflation.
Runaway or Galloping or Hyper – Inflation
This is a serious type of inflation. For example, it was experienced in Germany
after World War I and in Hungary and China after World War II. In this situation,
prices rise to a very great extent at high speed and high prices have to be paid even
for cheap things. And money becomes quite worthless and new currency has to be
introduced. This situation is known as galloping inflation or hyper-inflation.
2. Cost – Push Inflation
Cost – push inflation is induced by rising costs, including wages, so that rising
wages and other costs push up prices. We can also speak of wage inflation or price
inflation when we mean increase in wages or prices.
Bottleneck Inflation : This refers to inflation that results from shortages, imbalances
and rising marginal costs as full employment output is approached.
Profit – Push Inflation - Just as trade unions manage to push up wages,
oligopolists and monopolists will raise prices more than enough to cover increase in
costs with the aim of making monopoly profits.
Generally during war and in the post- war period, there will be inflation. This
is so because during war, the incomes of people increase. But there will be shortage
of goods and there may be rationing, control and things like that. So during the post -
war years, people who have been forced to save money will spend. That is, demand
for all sorts of goods will increase during that period but supply will not increase so
fast as that. This leads to inflation. Inflation occurs during war because the one great
aim at that time is that of winning the war. Since modern wars are so expensive,
the Government has to depend upon created money to finance war. This leads to
inflation. And inflation breeds inflation. It means that inflation leads to inflation. During
a period of inflation, prices will be high. Since prices are high, workers will demand
high wages. High wages result in high costs. High costs in turn lead to high prices.
Thus it forms a vicious circle. “Wages force up prices ; prices force up wages”. This
is the inflationary spiral. “Deficit financing” is another cause of inflation. This applies
particularly to underdeveloped countries with planned economies. Inflationary trends
can be noticed also during the boom period of a trade cycle.
Since inflation has many evils, every government tries to check it. Inflation
has destroyed many economies. For example the inflation that took place in 1923 in
Germany destroyed her economic system. Inflation can be checked by some or all of
the following measures.
(1) Increased taxation (2) By reducing government expenditure on capital projects.
(In India, this measure has been suggested to check inflation. Many capital
projects proposed in our Third Five Year Plan were either suspended or dropped
completely. (3) Restrictions on imports. (4)Rationing and (5) Price controls.
Sometimes a “wage freeze’ is recommended to check inflation. That is, trade
unions will be requested not to ask for an increase in wages during a given
period. The success of the above measures in tackling inflation depends upon
the efficiency of the government in implementing the measures.
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