Inflation
Inflation refers to the continuous rise in the general price level in the economy. It is not just persistent rise in the price level of one commodity. Inflation is a sustained increase in the average price level of a country.
The rate of inflation is measured by the annual percentage change in the level of prices as measured by the consumer price index. Inflation is a macroeconomic concept. It’s about aggregates. According to JM Keynes, inflation is an aspect of full employment. He says that inflation is the result of excess of aggregate demand over available aggregate supply. According to him, true inflation begins only after full employment.
Deflation: While an upward movement in the general price level in an economy is referred to as inflation, the downward movement in the general price level (i.e. a persistent fall in the general price) is referred to as a deflation. A sustained fall in the general price level is called deflation – i this situation, the rate of inflation becomes negative.
Key Terms of inflation
Headline Inflation Rate: measure of inflation based on relative changes in prices of all items in the consumer price index basket.
Underlying Inflation Rate (also called Core inflation): measure of inflation based on relative changes in prices for all goods and services excluding volatile elements (such as food crops, utilities, fuel and electricity for the case of less developed countries).
Creeping Inflation Rate: inflation at moderate rates but persisting over a long period. It is regarded as a normal state of affairs in many countries.
Deflation: A sustained fall in the general price level is called deflation
Stagflation: there is simultaneous existence of high rates of inflation and also increasing levels of unemployment.
Measuring Inflation is statistically
Inflation is statistically measured using percentages.
It is the percentage increase in the price index per unit time (a month quarter or year).
Main features of inflation
- Inflation is observed over a period because it is a rise in the general price level over a period.
- Inflation is a monetary phenomenon; and is generally due to excessive money supply.
- Inflation is an economic phenomenon as it is a result of interactions of economic forces (i.e. supply and demand for goods and services).
- Excess demand amidst inadequate supply is the essence of inflation.
- Pure inflation starts after full employment (This is based on Keynesian theory)
Types of inflation
Inflation types can be classified on the basis of speed, and according to its causes among others.
Inflation types according degree of intensity (speed): When classified and viewed according to the degree of intensity (speed), we explain two types
Creeping inflation: This is the mildest type of inflation which is generally regarded as conducive to economic growth. It is the slow increase in the general price level.
Hyper – inflation (galloping inflation): a situation where there is a rapid rise in the general price level. During such a period people prefer to keep real assets instead of money. Money loses total value. Money ceases to be a store of value.
Policies for addressing each type of inflation
