Inflation — Meaning, Types and Causes

Inflation is a sustained and persistent rise in the general price level of goods and services in an economy over a period of time, which results in a fall in the purchasing power of money. A one-time or temporary jump in a handful of prices is not inflation — inflation refers to a broad-based, continuing rise in the price level as a whole, typically tracked through price indices such as the Wholesale Price Index (WPI) or the Consumer Price Index (CPI).

Types of inflation, by cause:

• Demand-pull inflation — aggregate demand in the economy runs ahead of aggregate supply at the existing price level, often summarised as 'too much money chasing too few goods.' Contributing causes include an expansion of money supply and bank credit, higher government spending, rising exports, and growing population and income.
• Cost-push inflation — the cost of production itself rises, through higher wages, dearer raw materials and imported inputs, or higher indirect taxes, forcing producers to raise prices even without any extra pull from demand.

Types of inflation, by speed:

• Creeping inflation — a mild, slow rise in prices (broadly up to 3% a year), generally considered compatible with healthy growth.
• Walking (moderate) inflation — a somewhat faster rise (roughly 3–10% a year) that needs to be watched.
• Running inflation — a fast rise (roughly 10–20% a year) that begins to hurt the economy seriously.
• Hyperinflation — an extremely rapid, largely uncontrolled rise in prices, where money loses value almost from day to day and the currency can effectively collapse.

Types of inflation, by government control:

• Open inflation — prices are left free to rise without administrative intervention.
• Repressed (suppressed) inflation — the government artificially holds down prices (through rationing, price ceilings, or subsidies) even though the underlying inflationary pressure is present; this commonly produces shortages and black markets instead of removing the pressure.

Causes of inflation are usually grouped under two heads: …