If you look at the prices of commodities from a decade ago and compare them with the current prices, what will you notice? There is a definite increase in the prices of goods and services. This phenomenon is known as inflation in economics. Let us learn more about inflation and the classification of inflation.
What is Inflation?
Inflation is an economic concept. It refers to the rising prices of goods, commodities, and services in a particular economy. With the rising prices of goods and services, the purchasing value of money will decrease. So the purchasing power of the consumer will also see a decline.
For example, say the price of a loaf of bread 10 years ago was Rs.20/- and today it is, say Rs 35/-. So the 15/- increase in the price of a loaf of bread is due to the inflation in the economy.
There is no one cause of inflation in the economy. Economists have hypothesized a few theories, that in some combination may cause the overall inflation in a given economy.
- Demand-Pull Theory: As per this theory, inflation is caused due to the general increase in the demand for goods and service. So when demand outgrows the supply, the prices will increase.
- Cost-Push Theory: As the production costs of goods and services increase, then the companies are forced to increase the prices of the goods and services. This causes inflation in the economy.
- Monetary Inflation Theory: According to this theory, the increase in prices is due to the excessive supply of money in the market. This causes the value of money to drop, and the prices go up.
Classification of Inflation
Now, let us take a look at the classification of inflation in an economy. Some of the most prominent classification of inflation is as follows,
1] Creeping Inflation
Creeping inflation also known as mild inflation is as the name suggests a very slow rise in prices of goods and services. If the prices increase by 3% or less annually, then such inflation is creeping inflation. Such inflation is not harmful to the economy. In fact, as per the Federal Reserve, a 2% inflation rate is desirable. It is necessary for the economic growth of a country.
2] Walking Inflation
In this case, the inflation rate falls between 3% to 10%. Such inflation can be harmful to the economy. The economic growth of the country is too accelerated to sustain. Consumers start stocking goods fearing the prices will rise further. This causes excess demand and the prices increase further.
3] Galloping Inflation
When creeping and walking inflation are left unchecked, the rate of inflation will rise above 10%. This is galloping inflation. The currency of the country will lose value in the global economy. The salaries and income of common people will not be able to keep up with the ever-increasing prices of commodities. This will lead to the general instability of the economy and the country as a whole.
Next in the classification of inflation is hyperinflation. This when the inflation is completely out of control. No measures taken by the monetary authorities can control the prices. The rate of inflation can be 50% on a monthly basis. This is the last stage of inflation. A real-world example is that of Venezuela, where the IMF has predicted prices rose 13,000% in 2018.
Solved Example on Classification of Inflation
Q: What is stagflation?
Ans: Stagflation is a rare phenomenon where there is still an increase in prices of commodities, but the economic growth has become stagnant. It causes economic instability due to the rise in unemployment, severe inflation, and lack of economic growth.