Introduction
Inflation is a persistent rise in the general price level of goods and services in an economy over a period of time. It erodes the purchasing power of money, affects the cost of living, and has far-reaching implications for savings, investments, and economic stability. While moderate inflation is considered a sign of economic growth, uncontrolled inflation can disrupt consumption patterns, distort resource allocation, and create social and political unrest.
Understanding the types and causes of inflation is essential for policymakers, economists, and aspirants seeking to comprehend how economies function under various monetary and fiscal conditions. This blog offers a detailed analysis of the different types of inflation and their underlying causes.
Types of Inflation
Inflation can be classified based on various criteria, such as its rate, origin, and visibility. Each type provides insights into the nature of the inflationary pressure and the policy responses required to control it.
1. Based on Rate of Inflation
a. Creeping or Mild Inflation
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Occurs when the rate of inflation is slow and steady (typically under 3% annually).
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Often viewed as beneficial as it encourages consumption and investment.
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Example: Advanced economies targeting 2% annual inflation for price stability.
b. Walking Inflation
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Inflation rate between 3% to 10% per annum.
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Considered a warning signal. If unchecked, it can lead to galloping inflation.
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Can affect savings and lower the real value of wages.
c. Galloping Inflation
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Also known as running inflation, it occurs when the inflation rate is above 10% and rising rapidly.
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Leads to instability in the economy and reduces the real purchasing power dramatically.
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Example: Several developing countries in the past have experienced this during political or fiscal crises.
d. Hyperinflation
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An extremely high and typically accelerating inflation rate, often exceeding 50% per month.
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Usually associated with a collapse in the monetary system and loss of confidence in the currency.
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Example: Zimbabwe in the late 2000s and Germany during the 1920s.
2. Based on Cause of Inflation
a. Demand-Pull Inflation
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Arises when aggregate demand in the economy exceeds aggregate supply.
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"Too much money chasing too few goods."
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Common during economic booms or after fiscal stimulus or credit expansion.
Causes:
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Increase in consumer spending
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Expansionary fiscal policy (e.g., tax cuts, increased government spending)
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Rise in exports
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Easy monetary policy (low interest rates, high credit growth)
b. Cost-Push Inflation
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Caused by an increase in the cost of production inputs, such as wages, raw materials, and energy.
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Producers pass on increased costs to consumers, raising prices.
Causes:
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Rising oil prices
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Wage hikes through trade union negotiations
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Increase in indirect taxes (e.g., GST, excise)
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Supply-side bottlenecks (e.g., drought, transport disruption)
c. Built-in or Wage-Price Spiral Inflation
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A feedback loop where higher prices lead workers to demand higher wages, which in turn increases production costs, further driving prices up.
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Sustains inflation over the long term unless checked by policy.
3. Based on Visibility and Government Control
a. Open Inflation
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Inflation that is clearly visible in the form of rising prices in the market.
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No price controls; reflects true market dynamics.
b. Suppressed Inflation
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Inflation that exists but is hidden due to government price controls or rationing.
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Creates shortages, black markets, and distorts production and consumption decisions.
4. Based on Scope
a. Comprehensive Inflation
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Affects all sectors of the economy.
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Indicates widespread rise in price levels across consumer goods, services, and capital goods.
b. Sectoral Inflation
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Confined to one or a few sectors (e.g., fuel inflation, food inflation).
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May result from sector-specific supply disruptions.
Causes of Inflation
Inflation can be triggered by a multitude of factors. These are broadly categorized into demand-side, supply-side, monetary, and external causes.
1. Demand-Side Causes
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Excess Aggregate Demand: Rising demand for goods/services without a corresponding increase in output.
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Increase in Money Supply: More money in circulation without real growth leads to excess demand.
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Expansionary Fiscal Policy: High government spending or tax cuts can stimulate demand and push prices upward.
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Consumer Confidence and Spending: Higher expectations of income growth boost consumption.
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Easy Credit and Low Interest Rates: Promotes borrowing and increases liquidity in the market.
2. Supply-Side Causes
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Rising Input Costs: Increase in prices of raw materials, electricity, fuel, or transportation.
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Wage Increases: Higher wages without productivity growth raise production costs.
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Supply Chain Disruptions: Natural disasters, strikes, or wars that reduce the supply of essential goods.
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Import Dependency: Increases in prices of imported goods (e.g., oil) can feed into domestic prices.
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Agricultural Shortfalls: Poor monsoons can lead to food inflation in countries like India.
3. Monetary Causes
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Excessive Money Printing: When central banks print more money to finance fiscal deficits, it leads to inflation.
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Loose Monetary Policy: Persistently low interest rates and high liquidity without corresponding real output growth.
4. External Causes
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Imported Inflation: Inflation that originates in foreign markets and is transmitted through imports, especially when a country is dependent on imported raw materials or fuel.
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Currency Depreciation: Makes imports costlier and feeds into domestic inflation.
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Global Commodity Price Rise: Increase in crude oil, metals, or food grains globally impacts domestic prices.
Conclusion
Inflation is a complex and multifaceted economic phenomenon. While a moderate level of inflation may be indicative of healthy economic activity, excessive or uncontrolled inflation can distort economic decisions, hurt savings, and increase inequality. Understanding the various types of inflation—from creeping to hyperinflation—and their causes, whether from the demand side, supply side, monetary or external, is vital for designing effective macroeconomic policies.
In the Indian context, inflation is particularly sensitive due to the high share of food and energy in consumption expenditure. Hence, a mix of monetary tightening, fiscal discipline, and structural reforms is required to keep inflation under control while supporting growth.