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Home , Galloping inflation

MODULE I: (B) :

2.

After reading this unit you should be able to understand:

 Inflation  Kinds of inflation

INTRODUCTION

Inflation and are the two most significant problems of the Indian economy. These two are the big problems that plague all the economies. Almost everyone is sure that he knows what inflation exactly is, but it remains a source of great deal of confusion because it is difficult to define it unambiguously. One primary macroeconomic concern in economies is the maintenance of stable , or the control of inflation. Inflation is a situation where prices are persistently rising, thereby reducing the of money. It refers to a situation of constantly rising prices of commodities and factors of production. The opposite situation is known as —a situation of constantly falling prices of commo- dities and factors of production. Inflation is an increase in the general level of prices. It does not mean that prices are high, but, rather, that they are increasing. For example, assume that over the past 2 years the of a particular combination of consumer in country A has been stable at Rs. 100. Assume that in country B the price of that same combination of consumer goods has gone up from Rs. 10 to Rs. 30 over the last 2 years. Country B, not country A, faces a problem with inflation. Inflation refers to price movements, not price levels. With inflation, the price of every good and does not need to increase because inflation refers to an increase in the general level of prices. An inflation rate of 7% does not mean that all prices are increasing by 7%; it means that, on average, prices are going up by that amount. Also, the mere existence of an increase in the general level of prices is not necessarily a matter of concern in an economy. An inflation rate of 2% to 3% per year would not present a policy problem. However, when prices increase by a larger percentage, such as 8% to 10% or more per year, inflation is a serious issue. It is a process in which the is rising and money is losing value. There are two features of this definition. Firstly, it is a monetary phenomenon. It is the price level and, therefore, the value of money that is changing, not the price of some particular commodity. For example, if the price of oil rises but prices of computer fall so that the price level is constant, there is no inflation. When the rate of inflation jumps the planned levels it have serious consequences.

The rate at which the general level of prices increases can vary.

Hence there are several types of inflation according to the rate of increase: 1. Creeping Inflation: If the speed of upward thrust in prices is low but small then we have creeping inflation. It refers to a rise in the price level of a rate of 2 to 3% per annum. If the rate of price rise is kept at this level it is considered to be helpful for economic development. This type of inflation does not do much harm and may, in fact, stimulate .

2. Moderate (mild) Inflation: It refers to a rise of 4 to 5% inflation per annum and this rate is high enough to have undesirable effects. If the price level goes up by just 2 to 3% per annum, the situation is one of mild inflation. 3. Rapid Inflation: It refers to an annual rise of 6% or more in the general price . It is definitely harmful and has undesirable effects on incomes, imports and exports, and consumption.

4. (Recessionary Inflation): If mild inflation is left unchecked for a long period, it is converted into hyperinflation. Hyperinflation is a phenomenon that usually accompanies war and its aftermath. It is a consequence of an attempt to finance government expenditure through printing of paper money. At first, the government deficit may be slight and the addition to the price level insignificant. However, as the price level starts rising, the government must spend greater and greater nominal amounts of to obtain the same quantity of real resources. Meanwhile, consumers and investors come to anticipate further price rise and intensify their bidding for real . The climax of hyperinflation appears when the flight from money is such that the velocity of circulation approaches infinity. Hyperinflation is runaway inflation during which prices rise very fast. The value of money falls daily, or even hourly. People lose confidence in the currency and the monetary (currency) system ultimately breaks down. People refuse to accept payments in money. Commodities are preferred to money in most transactions. At the end, the currency ceases to function as money and has to be abandoned. Thus the money economy yields place to economy. This type of inflation occurred in the then West Germany in 1923.

5. Open vs. Suppressed Inflation: Open inflation is said to occur when the government makes to attempt to control it. However, when prices are controlled by certain administrative measures such as fixation of price-ceilings, or otherwise, inflation is said to have been suppressed (or repressed). Suppressed inflation also goes by the name repressed inflation. Suppressed inflation refers to a situation where demand exceeds supply, but the effect on prices is minimised by the use of such devices as price controls and rationing. It may be noted that price controls do not deal with the cause of inflation; they merely seek to suppress the symptoms. The excess demand still exists and it will tend to show itself in the form of waiting lists, queues, and, almost inevitably, in the form of black markets. Thus prices are held in check in the controlled sector but there is disproportionate rise in prices in the uncontrolled sector. This happens due to the fact that private cash holding as also holding of bank balances increase during a period of suppressed inflation.

6. Galloping Inflation: When inflation proceeds very fast or at a very rapid rate, it is called galloping inflation. Walking inflation may be converted into running inflation. Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shattered.”Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is labelled “galloping inflation”

7. Sellers’ Inflation: Nowadays, sellers often add a margin (mark-up) to cost before fixing up price. This causes mark-up inflation or sellers’ inflation.

8. Partial vs. True Inflation: According to some , any continuous rise in the price level must not be taken for inflation. Whenever the price level increases, the producers reap larger profits and necessarily tend to produce more. As a result of this, unemployed inputs are put into use, unemployed workers get jobs, unused land and capital goods are made use of. And, because of this, the volume of production also increases. So long as this happens, it can only be termed as partial inflation. Thus, partial inflation rises if the price level is accompanied by increase in the volume of production of goods and services. But partial inflation cannot continue for long. A time comes when all the factors become fully employed. In this condition of full employment no further increase in production can be envisaged. On the other hand, as a result of among the producers the factor-prices rent, and tend to rise. Since factor prices are also factor-incomes incomes of the suppliers of the factors of production, people have larger income than before. Larger incomes mean more expenditure and, necessarily, more pressure of purchasing power upon goods and services. For, in the situation of full employment, production cannot increase any further. It is tins situation which has been called true inflation by modern economists. Thus true inflation implies a situation of continuously rising price level without any possibility of corresponding increase in production.

Reference: http://egyankosh.ac.in/handle/123456789/19337 http://egyankosh.ac.in/bitstream/123456789/13597/1/Unit-4.pdf

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