Types of Inflation

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Offline Repon

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Types of Inflation
« on: August 07, 2014, 03:40:07 PM »
Types of Inflation
The Four Different Types, Plus Asset, Wage and Core Inflation
Inflation is when the prices of goods and services increase. There are four main types of inflation, categorized by their speed: creeping, walking, galloping, and hyperinflation. There are also many types of asset inflation and of course wage inflation. Many experts consider demand-pull and cost-push to be types of inflation, but they are actually causes of inflation, as is expansion of the money supply.

1. Creeping Inflation: Creeping or mild inflation is when prices rise 3% a year or less. According to the U.S. Federal Reserve, when prices rise 2% or less, it's actually beneficial to economic growth. That's because this mild inflation sets expectations that prices will continue to rise. As a result, it sparks increased demand as consumers decide to buy now before prices rise in the future. By increasing demand, mild inflation drives economic expansion.

2. Walking Inflation: This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow's much higher prices. This drives demand even further, so that suppliers can't keep up. More important, neither can wages. As a result, common goods and services are priced out of the reach of most people.

3. Galloping Inflation: When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. Galloping inflation must be prevented.

4. Hyperinflation: Hyperinflation is when the prices skyrocket more than 50% -- a month. It is fortunately very rare. In fact, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War.

5. Stagflation: Stagflation is just like its name says: when economic growth is stagnant, but there still is price inflation. This seems contradictory, if not impossible. Why would prices go up when there isn't enough demand to stoke economic growth? It happened in the 1970s when the U.S. went off the gold standard. Once the dollar's value was no longer tied to gold, the number of dollars in circulation skyrocketed. This increase in the money supply was one of the causes of inflation. Stagflation didn't end until then-Federal Reserve Chairman Paul Volcker raised the Fed funds rate to the double-digits -- and kept it there long enough to dispel expectations of further inflation. Because it was such an unusual situation, it probably won't happen again.

6. Core Inflation: The core inflation rate measures rising prices in everything except food and energy. That's because gas prices tend to escalate every summer, usually driving up the price of food and often anything else that has large transportation costs. The Federal Reserve uses the core inflation rate to guide it in setting monetary policy. The Fed doesn't want to adjust interest rates every time gas prices go up -- and you wouldn't want it to.

7. Deflation: Deflation is the opposite of inflation -- it's when prices fall. It's caused when an asset bubble bursts. That's what happened in housing in 2006. Deflation in housing prices trapped those who bought their homes in 2005. In fact, the Fed was worried about overall deflation during the recession. That's because deflation can turn a recession into a depression. During the Great Depression of 1929, prices dropped 10% -- a year. Once deflation starts, it is harder to stop than inflation.

8. Wage Inflation: Wage inflation is when workers' pay rises faster than the cost of living. This occurs when there is a shortage of workers, when labor unions negotiate ever-higher wages, or when workers effectively control their own pay. A worker shortage occurs whenever unemployment is below 4%. Labor unions negotiated higher pay for auto workers in the 90s. CEOs effectively control their own pay by sitting on many corporate boards, especially their own. All of these situations created wage inflation. Of course, everyone thinks their wage increases are justified. However, higher wages are one element of cost-push inflation, and can cause prices of the company's goods and services to rise.

9. Asset Inflation: An asset bubble, or asset inflation, occurs in one asset class, such as housing, oil or gold. It is often overlooked by the Federal Reserve and other inflation-watchers when the overall rate of inflation is low. However, as we saw in the subprime mortgage crisis and subsequent global financial crisis, asset inflation can be very damaging if left unchecked.

10. Asset Inflation -- Gas: Gas prices rise each spring in anticipation of the summertime vacation driving season. In fact, you can expect gas prices to rise ten cents per gallon each spring. However, political uncertainty in the oil-exporting countries drove gas prices higher in 2011 and 2012. Prices hit an all-time peak of $4.17 in July 2008, thanks to economic uncertainty. For more on that, see Gas Prices in 2008.
What do oil prices have to do with gas prices? A lot. In fact, oil prices are responsible for 72% of gas prices. The rest is distribution and taxes, which aren't as volatile as oil prices. For more, see How Do Crude Oil Prices Affect Gas Prices?

11. Asset Inflation -- Oil: Crude oil prices hit an all-time high of $143.68 a barrel in July 2008. This was in spite of a decrease in global demand and an increase in supply. Oil prices are determined by commodities traders, both speculators and corporate traders hedging their risks. Traders will bid up oil prices if they think there are threats to supply, such as unrest in the Middle East, or an uptick in demand, such as growth in China.

12. Asset Inflation -- Food: Food prices soared 6.8% in 2008, causing food riots in India and other emerging markets. They spiked again in 2011, rising 4.8% and leading to the Arab Spring, according to many economists. Food riots caused by inflation in this important asset class could continue to reoccur.

13. Asset Inflation -- Gold: An asset bubble occurred when gold prices hit the all-time high of $1,895 an ounce on September 5, 2011. Although many investors might not call this inflation, it sure was. That's because prices rose without a corresponding shift in gold's supply or demand. Instead, investors drove up gold prices as a safe haven. They were concerned about the declining dollar, hyperinflation in U.S. goods and services, and uncertainty about global stability. What spooked investors? In August, the jobs report showed absolutely zero new jobs gains. During the summer, the euro zone debt crisis looked like it might not get resolved and there was stress about whether the U.S. would default on its debt. Gold prices go up in response to uncertainty, whether it's to hedge against inflation or its exact opposite, the resurgence of recession.

Senior Lecturer in Accounting
Department of Business Administration
Faculty of Business & Economics
Daffodil International University

Offline sajib

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Re: Types of Inflation
« Reply #1 on: August 14, 2014, 12:49:07 PM »
Types of Inflation in Economics

This article briefly explains different types of inflation in economics with examples, wherever necessary. Following article is also supplemented with a hierarchical diagram (given below this paragraph) to help readers summarize and quickly assimilate various types of inflation. Click on the following diagram (figure) listing different types of inflation to get a zoomed preview of it.

1. Types of Inflation on Coverage

Types of inflation on the basis of coverage and scope point of view:-
1.   Comprehensive Inflation : When the prices of all commodities rise throughout the economy it is known as Comprehensive Inflation. Another name for comprehensive inflation is Economy Wide Inflation.
2.   Sporadic Inflation : When prices of only few commodities in few regions (areas) rise, it is known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon (winds bringing seasonal rains in India).

 2. Types of Inflation on Time of Occurrence

Types of inflation on the basis of time (period) of occurrence:-
1.   War-Time Inflation : Inflation that takes place during the period of a war-like situation is known as War-Time inflation. During a war, scare productive resources are all diverted and prioritized to produce military goods and equipments. This overall result in very limited supply or extreme shortage (low availability) of resources (raw materials) to produce essential commodities. Production and supply of basic goods slow down and can no longer meet the soaring demand from people. Consequently, prices of essential goods keep on rising in the market resulting in War-Time Inflation.
2.   Post-War Inflation : Inflation that takes place soon after a war is known as Post-War Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than what experienced during the war.
3.   Peace-Time Inflation : When prices rise during a normal period of peace, it is known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of a long gestation (development) period.

3. Types of Inflation on Government Reaction

Types of inflation on basis of Government's reaction or its degree of control:-
1.   Open Inflation : When government does not attempt to restrict inflation, it is known as Open Inflation. In a free market economy, where prices are allowed to take its own course, open inflation occurs.
2.   Suppressed Inflation : When government prevents price rise through price controls, rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However, when government controls are removed, Suppressed inflation becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.

 4. Types of Inflation on Rising Prices

Types of inflation on the basis of rising prices or rate of inflation:-
1.   Creeping Inflation : When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P. Kent, when prices rise by not more than (upto) 3% per annum (year), it is called Creeping Inflation.
2.   Chronic Inflation : If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation.
3.   Walking Inflation : When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation.
4.   Moderate Inflation : Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem.
5.   Running Inflation : A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.
6.   Galloping Inflation : According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation. India has been witnessing galloping inflation since the second five year plan period.
7.   Hyperinflation : Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe's regime.

5. Types of Inflation on Causes

Types of inflation on the basis of different causes:-
1.   Deficit Inflation : Deficit inflation takes place due to deficit financing.
2.   Credit Inflation : Credit inflation takes place due to excessive bank credit or money supply in the economy.
3.   Scarcity Inflation : Scarcity inflation occurs due to hoarding. Hoarding is an excess accumulation of basic commodities by unscrupulous traders and black marketers. It is practised to create an artificial shortage of essential goods like food grains, kerosene, etc. with an intension to sell them only at higher prices to make huge profits during scarcity inflation. Though hoarding is an unfair trade practice and a punishable criminal offence still some crooked merchants often get themselves engaged in it.
4.   Profit Inflation : When entrepreneurs are interested in boosting their profit margins, prices rise.
5.   Pricing Power Inflation : It is often referred as Administered Price inflation. It occurs when industries and business houses increase the price of their goods and services with an objective to boost their profit margins. It does not occur during a financial crisis and economic depression, and is not seen when there is a downturn in the economy. As Oligopolies have the ability to set prices of their goods and services it is also called as Oligopolistic Inflation.
6.   Tax Inflation : Due to rise in indirect taxes, sellers charge high price to the consumers.
7.   Wage Inflation : If the rise in wages in not accompanied by a rise in output, prices rise.
8.   Build-In Inflation : Vicious cycle of Build-in inflation is induced by adaptive expectations of workers or employees who try to keep their wages or salaries high in anticipation of inflation. Employers and Organisations raise the prices of their respective goods and services in anticipation of the workers or employees' demands. This overall builds a vicious cycle of rising wages followed by an increase in general prices of commodities. This cycle, if continues, keeps on accumulating inflation at each round turn and thereby results into what is called as Build-in inflation.
9.   Development Inflation : During the process of development of economy, incomes increases, causing an increase in demand and rise in prices.
10.   Fiscal Inflation : It occurs due to excess government expenditure or spending when there is a budget deficit.
11.   Population Inflation : Prices rise due to a rapid increase in population.
12.   Foreign Trade Induced Inflation : It is divided into two categories, viz., (a) Export-Boom Inflation, and (b) Import Price-Hike Inflation.
13.   Export-Boom Inflation : Considerable increase in exports may cause a shortage at home (within exporting country) and results in price rise (within exporting country). This is known as Export-Boom Inflation.
14.   Import Price-Hike Inflation : If a country imports goods from a foreign country, and the prices of imported goods increases due to inflation abroad, then the prices of domestic products using imported goods also rises. This is known as Import Price-Hike Inflation. For e.g. India imports oil from Iran at $100 per barrel. Oil prices in the international market suddenly increases to $150 per barrel. Now India to continue its oil imports from Iran has to pay $50 more per barrel to get the same amount of crude oil. When the imported expensive oil reaches India, the indian consumers also have to pay more and bear the economic burden. Manufacturing and transportation costs also increase due to hike in oil prices. This, consequently, results in a rise in the prices of domestic goods being manufactured and transported. It is the end-consumer in India, who finally pays and experiences the ultimate pinch of Import Price-Hike Inflation. If the oil prices in the international market fall down then the import price-hike inflation also slows down, and vice-versa.
15.   Sectoral Inflation : It occurs when there is a rise in the prices of goods and services produced by certain sector of the industries. For instance, if prices of crude oil increases then it will also affect all other sectors (like aviation, road transportation, etc.) which are directly related to the oil industry. For e.g. If oil prices are hiked, air ticket fares and road transportation cost will increase.
16.   Demand-Pull Inflation : Inflation which arises due to various factors like rising income, exploding population, etc., leads to aggregate demand and exceeds aggregate supply, and tends to raise prices of goods and services. This is known as Demand-Pull or Excess Demand Inflation.
17.   Cost-Push Inflation : When prices rise due to growing cost of production of goods and services, it is known as Cost-Push (Supply-side) Inflation. For e.g. If wages of workers are raised then the unit cost of production also increases. As a result, the prices of end-products or end-services being produced and supplied are consequently hiked.

6. Types of Inflation on Expectation

Types of inflation on the basis of expectation or predictability:-
1.   Anticipated Inflation : If the rate of inflation corresponds to what the majority of people are expecting or predicting, then is called Anticipated Inflation. It is also referred as Expected Inflation.
2.   Unanticipated Inflation : If the rate of inflation corresponds to what the majority of people are not expecting or predicting, then is called Unanticipated Inflation. It is also referred as Unexpected Inflation.


Kamrul Hossain Sajib
Assistant Controller of Examination
Daffodil International University

Offline fatema nusrat chowdhury

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Re: Types of Inflation
« Reply #2 on: August 14, 2014, 01:20:16 PM »
Very informative post. Thank you for sharing