Inflation refers to a sustained rise in general level of prices over a period of time in the economy. This results in fall in the value of money i.e., purchasing power of money over a period of time.
- Deflation: Refers to a fall in the general level of prices over a period of time. (Negative rate of inflation)
- Disinflation: slowing down of rate of inflation
- Skewflation: General price rise over a sustained period of time is skewed to one or a small group of commodities.
- Galloping inflation: Very high inflation running in the range of double-digit or triple–digit (20%, 200% per year). It is also known as hopping inflation, jumping inflation, and running or runaway inflation.
- Hyperinflation: Large & accelerating inflation, when prices rise by more than 50% a month. (very rare) Examples include Germany in 1920s, Zimbabwe in 2000s and Venezuela in 2010s.
- Creeping Inflation: Refers to gradual rise in price levels along time. (Good for the economy, also called mild inflation).
- Bottleneck Inflation: Also called as structural inflation, it occurs when supply falls drastically and the demand remains at the same level.
- Inflation Tax: Refers to penalty for holding cash at a time of high inflation due to erosion of value of money.
- Philips Curve: Establishes the inverse relation between inflation and unemployment. Accordingly, as levels of unemployment decrease, inflation increases
- Stagflation: A situation characterised by slow economic growth and high unemployment (stagnation) accompanied by inflation.
Types of inflation
Based on its origin, inflation is categorised into demand-pull and cost-push inflation.
- Cost-push Inflation: Caused by rise in prices of factors of production such as increased cost of raw materials, electricity, rent, labour etc.
- Demand-pull Inflation: Occurs in a situation where demand increases due to excess money supply with people without increase in supply level. In other words, it occurs when too much money chasing too few goods.
Measures of Inflation
- The rate of inflation is measured based on price indices.
- Price index measures the average level of prices and not that of a single good.
- The Inflation is measured on a point-to-point basis i.e., prices in the current month are compared with the prices in the corresponding month of the previous year.