Definition, Types And Causes of Inflation

INTRODUCTION

Inflation may be defined as the persistent rise in the general price level of goods and services. Inflation occurs when the volume of purchases is permanently running ahead of production, with too much money in circulation chasing too few goods.

TYPES OF INFLATION

There are four main types of inflation. These are:

1. Demand-pull inflation: Demand-pull inflation occurs when consumers have high purchasing power, leading to increase in aggregate demand without a corresponding increase in supply. In other words, this inflation occurs when the demand for goods and services is greater than their supply. The factors responsible for this type of inflation may be due to population increase, increase in workers' salaries and wages etc.
2. Cost-push inflation: Cost-push inflation occurs when increases in cost of production are passed on to the consumers in the form of high prices of goods and services are pushed up by rising costs.
3. Hyper-inflation: Hyper-inflation, which is also known as galloping or run-away inflation, occurs when a persistent inflation becomes uncontrollable and the value of money keeps declining rapidly. Prices of goods and services rise at a fast rate, leading to money loosing its value or its purchasing power ( ability to buy goods). The major causes of hyper-inflation are war,budget deficits, etc.
4. Persistent or Creeping inflation: Persistent or creeping inflation, which is also known as chronic inflation, occurs when there is a slow but steady rise in volume of purchasing power and fall in supply of goods and services. In other words, when inflation involves a slow but steady rise in the general prices of goods and services. It is known as creeping inflation.

CAUSES OF INFLATION

There are many causes of inflation, some of which are:

1. Increase in demand: When the demand for goods and services is greater than supply, this results in inflation (demand-pull inflation).
2. Low production: Low production of goods and services can lead to their scarcity and when supply cannot meet up with high demand, inflation sets in.
3. War: War is a major cause of inflation as people no longer produce, resulting in high volume of money pursuing fewer goods.
4. Increase in salaries and wages: When salaries and wages are increased without corresponding increase in supply of goods and services, it can lead to excess money in circulation chasing fewer goods.
5. High cost of production: When there is high cost of production, producers build in this high cost into the cost per unit and pass it to consumers, leading to inflation (cost-push inflation).
6. Budget deficit: When government expenditure is more than its income, it results in budget deficit and this leads to inflation.
7. Increase in population: A sudden rise in population will result in a corresponding rise in demand for goods and services and if there is no more corresponding rise in supply, it will result in inflation.
8. Excessive bank lending: This can lead to excessive money in circulation chasing fewer goods and services.
9. Level of importation: High cost of importing raw materials can lead to high cost of producing goods, which is passed to chasing few goods and services.
10. Hoarding: It is the act of creating artificial scarcity of goods and can lead to inflation.
11. Industrial strike: prolonged strike can cause scarcity of goods and services, leading to inflation.
12. Inadequate storage facilities: When goods produced cannot be stored for future use, it can lead to scarcity, resulting in inflation.
13. Money laundering can also lead to inflation.