There are different forms of inflation in the economy. In this article, we will take a look at these different types of inflation like Demand-Pull Inflation, Cost-push inflation, Open Inflation, Repressed Inflation, Hyper-Inflation, Creeping and Moderate inflation, True inflation, and Semi inflation in detail.
Types of Inflation
- Demand Pull Inflation
- Cost-Push Inflation
- Open Inflation
- Repressed Inflation
- Creeping and Moderate Inflation
- True Inflation
Demand Pull Inflation
This is when the aggregate demand in an economy exceeds the aggregate supply. This increase in the aggregate demand might occur due to an increase in the money supply or income or the level of public expenditure.
This concept is associated with full employment when altering the supply is not possible. Take a look at the graph below:
In the graph above, SS is the aggregate supply curve and DD is the aggregate demand curve. Further,
- Op is the equilibrium price
- Oq is the equilibrium output
Exogenous causes shift the demand curve to the right to D1D1. Therefore, at the current price (Op), the demand increases by qq2. However, the supply is Oq.
Hence, the excess demand for qq2 puts pressure on the price, increasing it to Op1. Therefore, there is a new equilibrium at this price, where demand equals supply. As you can see, the excess demand is eliminated as follows:
- The price rises which leads to a fall in demand and a rise in supply.
Learn more about the Impact of Inflation here in detail.
Supply can also cause inflationary pressure. If the aggregate demand remains unchanged but the aggregate supply falls due to exogenous causes, then the price level increases. Take a look at the graph below:
In the graph above, the equilibrium price is Op and the equilibrium output is Oq. If the aggregate supply falls, then the supply curve SS shifts left to reach S1S1.
Now, at the price Op, the demand is Oq but the supply is Oq2 which is lesser than Oq. Therefore, the prices are pushed high till a new equilibrium is reached at Op1.
At this point, there is no excess demand. Hence, you can see that inflation is a self-limiting phenomenon.
This is the simplest form of inflation where the price level rises continuously and is visible to people. You can see the annual rate of increase in the price level.
Let’s say that there is excess demand in an economy. Typically, this leads to an increase in price.
In hyperinflation, the price level increases at a rapid rate. In fact, you can expect prices to increase every hour. Usually, this leads to the demonetization of an economy.
Creeping and Moderate Inflation
- Creeping – In this case, the price level increases very slowly over an extended period of time.
- Moderate – In this case, the rise in the price level is neither too fast nor too slow – it is moderate.
This takes place after the full employment of all the factor inputs of an economy. When there is full employment, the national output becomes perfectly inelastic. Therefore, more money simply implies higher prices and not more output.
Solved Question on Forms of Inflation
Q1. What are the different types of inflation?
Answer: The different types of inflation are:
- Demand Pull