Inflation is an economic condition in which general price level rise, and currency is devalued over a period of time. The value of currency decreases and resulted in erosion of purchasing power. One unit of currency can purchase fewer goods and services. Currently inflation rate in developed countries is below 5% and in developing countries upto25%. In some countries there is hyper inflation, and rate is above 100%. Inflation rate between 5% to 7% is considered a healthy and good for growth of economy.
Types of Inflation
Below are the four major types of inflation caused by different economic forces.
Monetary Inflation: Monetary inflation is directly related to control of money. It is a direct result of supply of currency, excessive money creation cause monetary inflation. The printing of more currency by the government increases the inflation rate.
Wage Inflation/Demand-pull Inflation
When demand of product and services exceeds the supply of the product in the economy it is known as wage or demand-pull inflation. This scarcity of good and services pushes the general price level upward. This trend follow the common law of demand as demand increases so the prices level and situation prevail until supply adjust accordingly. In the time of emergencies like during or after wartime the affect is more Sevier.
When the cost of production increase it has a direct affect of price incremental shift to end user, this increase in price level is called cost-push inflation. For example if the there is a rise in labor wages it will increase the unit cost and price of that product will increase. Once this price upward movement trend set forth it affects whole economy and inflation level rise. Cost-push inflation may or may not be occur with Wage inflation.
Oligopolistic inflation/Pricing Power Inflation
Commonly known as administered price inflation, this type of inflation occurs when the industries and professionals decide to increase prices for increasing their profit margins. Oligopolistic appeared when some oligopoly oriented industries have control over demand and supply and they manipulate this to set the price level for increase their profits. A significant point for oligopolistic inflation is it doesn’t exist in financial crises and economic depression.
[linkunit]Another major type of inflation is sectoral inflation, it is an Increase in the price of such commodity which have its affect on other sectors of economy for instance if price of the crud oil goes up it will directly affect other sectors; its impact on aviation industry can be seen where the fares go up. In recession time it effect adversely and could cause layoffs. When increase of prices in one sector of economy has its effect on other sectors it is known as sectoral Inflation.
Other Types of Inflation
Hyper inflation is the type of inflation in which inflation level wet abnormally high. The economies in disaster like war mostly face hyper inflation. This is the time when there is shortage of supplies of all necessities of life and prices go extraordinarily high. Hyper or runaway inflation doesn’t sustain for a long time. In recent years hyper inflation can be seen in Zimbabwe.
Fiscal inflation is a result of excessive government expenditures. When there is fiscal inflation there will be deficit budget.
Causes of Inflation
Increase in average earning results in increase in demand of product and services, which leads to increase in price level.
Political instability cause the unstable economic condition leads to production cycle disturbed and Inflation rate goes high.
When business houses decide to increase their profit margins the prices also raises in result, normally it is activity of upward phase of business cycle.
Balance of Payment and Balance of Trade
International trade has an effect on the countries policies; change in foreign currency rates make changes the balance of payments and push inflation rate higher.