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Inflation is commonly understood as a situation of substantial and rapid general increase in

the price level and consequent fall the value of money over a period of time. Inflation

means persistent rise in the general level of prices. Inflation is a long term operating

dynamic process. By and large, inflation is also a monetary phenomenon. It is usually

characterized by an overflow of money and credit. In fact, the root cause of inflation is theexpansion of money supply beyond the normal absorbing capacity of the economy. The

behavior of general prices is measured through price indices. The trend of price indices

reveals the course of inflation or deflation in the economy. Crowther defines inflation as a

state in which the value of money is falling, ie., prices are rising. Professor Samuelson

defines Inflation occurs when the general level of prices and costs is rising.

Types of Inflation.

On different grounds, economists have classified inflation into various types. According to

the rate inflation there are four types of inflation.

Moderate Inflation Running Inflation Galloping Inflation Hyper Inflation

Moderate inflation is a mild and tolerable form of inflation. It occurs when prices are rising

slowly. When the rate of inflation is less than 10 per cent annually, or it is a single digit

annual inflation rate, it is considered to be moderate inflation in the present day economy.It does not disrupt the economic balance. It is regarded as stable inflation in which the

relative prices do not get far out of line.

When the movement of price accelerates rapidly, running inflation emerges. Running

inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices

rise by more than 10 per cent a year, running inflation occurs. When prices are rising at

double or triple digit rates of 20,100 or 200 per cent a year, the situation may be described

as galloping inflation. Galloping inflation is really a serious problem. It causes economic

distortions and disturbances.

In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per year.

There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130

per cent times. Hyper inflation is a monetary disease.

Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull Inflation

and Cost Push Inflation.

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Demand Pull Inflation: According to the demand-pull theory, prices rise in response to an

excess of aggregate demand over existing supply of goods and services. It is also called

excess-demand inflation. In the excess-demand theories of inflation, excess demand means

aggregate real demand for output in excess of maximum feasible, or potential, or full

employment, output (at the going price level). The demand-pull theorists point out thatinflation (demand-pull) might be caused, in the first place, by an increase in the quantity of

money. Demand-pull or just demand inflation may be defined as a situation where the total

monetary demand persistently exceeds total supply of real goods and services at current

prices, so that prices are pulled upwards by the continuous upward shift of the aggregate

demand function. Causes of Demand-pull inflation are

Increase in Public Expenditure. Increase in Investment. Increase in money supply.

Cost Push Inflation: Cost push inflation or cost inflation is induced by the wage-inflation

process. This is especially true for a Country like India, where labour intensive techniques

are commonly used. Theories of cost-push inflation (also called sellers or mark-up

inflation) came to be put forward after the mid-1950s.They appeared largely in refutation

of the demand-pull theories of inflation and three important common ingredients of such

theories are 1) that the upward push in costs is autonomous of the demand conditions in

the concerned market 2) that the push forces operate through some important cost

component such as wages, profits (mark up), or materials cost. Accordingly, cost-push

inflation can have the forms of wage-push inflation, profit-push inflation, material-costpush inflation, or inflation of a mixed variety in which several push factors reinforce each

other and that the increase in costs is passed on to buyers of goods in the form of higher

prices, and not absorbed by producers. Thus, a rise in wages leads to a rise in the total cost

of production and a consequent rise in the price level, because fundamentally, prices

are based on costs.It has been said that a rise in wages causing arise in prices may , in turn

, generate an inflationary spiral because an increase would motivate the workers to

demand more wages.

Measures to Control Inflation

Inflation should be controlled in the beginning stage, otherwise it will take the shapeofhyper-inflationwhich will completely run the country. The different methods used to

control inflation are known as anti-inflationary measures. These measures attempt

mainly at reducing aggregate demand for goods and services on the basic assumption that

inflationary rise in prices is due to an excess of demand over a given supply of goods and

services.

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Read more:Economic Policies to Control Inflation

Anti-inflationary measuresare of four types:

1. Monetary policy2. Fiscal policy3. Price control and rationing4. Other methods

1. Monetary Policy

It is the policy of the central bank of the country, which is the supreme monetary and

banking authority in a country. The central bank may use such methods as the bank rate,

open market operations, the reserve ratio and selective controls in order to control the

credit creation operation of commercial banks and thus restrict the amounts of bank

deposits in the country. This is known as tight money policy. Monetary policy to control

inflation is based on the assumption that a rise in prices is due to a larger demand for goods

and services, which is the direct result of expansion of bank credit. To the extent this is

true, the central banks policy will be successful.

2. Fiscal Policy

It is the policy of a government with regard to taxation, expenditure and public borrowing.

It has a very important influence on business and economic activity. Taxes determine the

size or the volume of disposable income in the hands of the public. The proper tax policy to

control inflation will avoid tax cuts, introduce new taxes and raise the rates of existing

taxes. The purpose being to reduce the volume of purchasing power in the hands of the

public and thus reduces their demand. A precisely similar effect will be achieved if

voluntary or compulsory savings are increased. Savings will reduce current demand for

goods and thus reduce the inflationary rise in prices.

As an anti-inflationary measure, government expenditure should be reduced. This

indicates that demand for goods and services will be further reduced. This policy of

increasing public revenue through taxation and decreasing public expenditure is known as

surplus budgeting. However, there is one important difficulty is this policy. It may be easy

to increase revenue in times of inflation when people have more money income, but

difficult to reduce public expenditure. During war times as well as during a period of

development, it is absolutely impossible to reduce the planned expenditure. If the

government has already taken up a scheme or a group of schemes, it is ruinous to give

them up in the middle. Therefore, public expenditure cannot be used as an anti-

inflationary measure. Lastly, public debt, i.e., the debt of the government may be managed

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in such a way that the supply of money in the country may be controlled. The government

should avoid paying back any of its previous loans during inflation so as to prevent an

increase in the circulation of money. Moreover, if the government manages to get asurplus

budget, it should be used to cancel public debt held by the central bank. The result will be

anti-inflationary since money taken from the public and commercial banks is being

cancelled out and is removed from circulation. But the problem is how to get

abudgetsurplus, which is extremely difficult.

3. Price Control and Rationing

This is the most important and effective method available during war and

other critical times particularly because both monetary and fiscal policies are more or less

useless during this period. Price control implies the establishment to legal upper limits

beyond which prices of particular goods should not rise. The purpose of rationing, on the

other hand, is to distribute the goods in short supply in an equitable manner among all

people, irrespective of their wealth and social status. Price control and rationing generally

go together. The chief objection behind use of this method to fight inflation is that they

restrict the freedom of the consumers and thus limit their welfare. Besides, its success

depends on administrative efficiency, which in many underdeveloped countries is very low.

4. Other Methods

1. Another important anti-inflationary device is to increase the supply of goodsthrough either increased production or imports. Production may be increased by

shifting factors of production from the production of less inflation sensitive goods,

which are in comparative abundance to the production of those goods which are inshort supply and which are inflation-sensitive. Moreover, shortage of goods

internally may be relieved through imports of inflation sensitive goods, either on

credit or in exchange for export of luxury goods and other non-essentials.

2. A word may be added about the measures to controlcost-push inflation. It issuggested that wages, salaries and profit margins should be controlled and fixed

through a system of income freeze. Business units may particularly welcome wage

freeze. However, wage freeze is not so easy or just, unless trade unions agree to the

proposal and there is also freezing of prices. At the same time, the Government

should not raise the rates of commodity taxes. Thus, it is difficult to controlcost

push inflationthrough controlling wages and other incomes. The best method is to

bring a rapid increase in production, which will automatically check prices and

wages also.

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