Meaning and Types of Inflation

Inflation is a sustained, persistent rise in the general price level of goods and services in an economy over a period of time, which correspondingly reduces the purchasing power of a unit of money. Two words matter here: 'general' (inflation is about the overall price level, not the price of one good rising because of a poor harvest, say) and 'sustained/persistent' (a one-time, temporary price jump is not, by itself, inflation).

Classification by rate of price rise:

• Creeping inflation — a mild rise, conventionally up to about 3% per year; considered normal and even healthy, since it is usually associated with a growing economy.
• Walking (or trotting) inflation — a moderate rise, roughly 3% to 10% per year; a warning sign that needs monitoring.
• Galloping inflation — a rise in double digits or higher (roughly 10% to a few hundred percent a year); seriously disruptive, erodes confidence in money.
• Hyperinflation — an extremely rapid, virtually uncontrollable rise, where prices can rise many times over within days or weeks and money loses value almost as fast as it is earned; historically documented in Germany in the 1920s and in Zimbabwe in the late 2000s, both widely cited as textbook examples of a currency's collapse.

Classification by cause:

• Demand-pull inflation — occurs when aggregate demand in the economy rises faster than aggregate supply (output) can keep up, so 'too much money chases too few goods' and prices are pulled upward.
• Cost-push inflation — occurs when the cost of producing goods rises (e.g. wages, raw materials, imported inputs) and producers pass this higher cost on as higher prices, even without any change in demand.

Classification by government control:

• Open inflation — prices are allowed to rise freely as market forces dictate, with no price controls. …