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Types of Inflation in Economics: Understanding Different Types of inflation rates
On the most fundamental level, inflation is considered a normal increase in the price of the economy and is a significant part of the economy. Inflation is quite visible when you see the price increase on the most basic consumables like bread, butter, milk, cinema tickets, etc. Inflations’ most basic definition is that inflation is the rate at which the price of multiple goods and services existing in a market are raised over a defined period of time.
Types of inflations
There are various types of inflations that are explained as follows:
Stagflation
Stagflation is defined as a time in the economy when it is stagnant, and inflation is present as well. This can be damaging. This type of inflation is considered an assortment in the economic world. This, combined with poor economic growth, results in high unemployment and a lot of inflation as well. Stagflation is considered a brutal challenge to the main banks as it enhances the risk linked with fiscal and monetary changes and policies. The central banks can normally increase the interest rates to tackle high inflation, and doing this in a period of stagflation can increase the risk of unemployment as well.
Hyperinflation
As consumers, many people hate rising prices, many economists are of the impression that a normal degree of inflations is important for a state’s economy. Therefore, central banks focus on a consistent inflation of around 2% to 3%. Any further enhancements in the hyperinflation can mean a risk of hyperinflation. This creates a worse scenario for which inflation is considered not manageable.
Negative Inflation
Negative inflation is also known as deflation. It occurs when the prices drop for multiple reason. Basic economics teaches us that a lesser money supply improves the value of money which is important for decreasing the prices. A minimizing in demand because of a large supply or less consumers spending is also a reason for negative inflation.
Negative inflation or deflation is beneficial for reducing the cost of goods and services, this makes it more cost-effective but it can also adversely affect a nations economy in the longer run. When a business created lesser cash from their products and services so they have no chance but to find cost reduction ways which often translates to cutting of your workforce which increases unemployment.Â
Common theories related to inflation
Following are some of the important and key theories that explain inflation.
Keynesian Economics
The Keynesian school of thought is of the opinion that inflation is a result of economic burdens like increasing costs of production or a massive increase in demand.
Following are some of the important points of the Keynesian school of thought.
- According to this theory, the cost-push inflation is a product of price increases from the costs of the production. These factors incorporate economic aspects like capital, labor, land, entrepreneurship, etc. These are the mandatory aspects for generating goods and services. The price of these factors increases as producers who want to keep possession of their profit levels should enhance the cost of their goods and services. As the production price increases on a broader economic level. This can lead to an improvement in consumer prices as well as the whole economy. This happens as producers provide an increased cost to consumers. Consumer prices have now increased due to production costs.
- The demand-pull inflation concept from this theory tells us that demand-pull inflation results from a lot of demand reciprocal to supply. For instance, a renowned product where demand for the product completely overshadows the supply. The cost of the product would definitely improve too. This concept of demand-pull inflation results in the demand exceeding the supply, which in turn increases the prices.
Monetarism
According to monetarists, inflation is a result of expanding a firms money supply. The monetarists perspective is influenced by the Friedman remark that says that inflation is almost and always a monetary concept. This view tells us that the main factor affecting inflation is not related to labor, material costs or consumer wants. but rather it is all influenced by the supply of money.
The main reason for inflation
The literal cause behind inflation is categorized as demand-pull inflation, cost increase inflation, and pre-existing inflation. The demand-pull inflation happens when the demand for goods and services is far superior to the production limit. Cost-push inflation happens when there is an increase in production price, which increases prices. The built-in inflation happens when prices and wages increase too much to maintain the purchasing power.
Advantages of inflation
When the price increases the borrowers normally benefit from inflation as they are paying their debts with money that has depreciated.
The worst thing to do during an inflation
When inflation arises, the last thing you want to do is invest in the retail industry of sturdy goods industry or the technological sector. This is because when inflation arises, people normally want to spend as lesser as possible because of higher prices.
Final Words
As you can see, inflation occurs in many types, history has made it quite evident that there have been extreme scenarios of hyperinflation and stagflation. The theories keynesian and monetarist provide a different reason for the cause of inflation. This undermines the fact that inflation is a far trickier aspect as compared to what people think.
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