Inflation is an economic phenomenon that affects people globally. However, it is particularly impactful in developing countries, where high inflation rates can lead to a decrease in the purchasing power of citizens. It can further lead to instability in financial markets and cause social unrest. Understanding the types of inflation and the reasons behind its occurrence is crucial in developing effective strategies to mitigate its effects. Let’s learn more about inflation, its types and the factors that contribute to high inflation rates.
In a Nutshell
Types of Inflation
Inflation is an economic term that is characterised by a sustained increase in the general price level of goods and services. It means that the purchasing power of a currency decreases, and the same amount of money can buy fewer goods and services than it did before. Inflation is generally categorized into three types, depending on the cause and magnitude of the increase in price:
Demand-pull inflation
This type of inflation occurs when the demand for goods and services exceeds the supply available in the economy, leading to a price hike. Demand-pull inflation is caused by an increase in consumer spending, government spending, or investment. For example, if the government implements a large infrastructure spending program, it may increase demand for goods and services, which could lead to an increase in prices.
Cost-push inflation
Cost-pull inflation occurs when the cost of production or manufacturing cost increases, which causes an uptrend in prices. The main drivers of cost-push inflation are an increase in the prices of raw materials, wages, and taxes. For example, an increase in fuel prices will resultantly increase the cost of manufacturing goods, transportation costs, and other overheads. To meet the expenses companies will transfer the additional cost to the consumer to meet its profit margins.
Built-in inflation
The economy is in built-in inflation when expectations of future inflation become embedded in the wage and price-setting behaviour of individuals and businesses. For example, if workers expect inflation to increase in the future, they may demand higher wages to compensate for the expected increase in the cost of living. This increase in wages will lead to higher costs for businesses, who may then increase their prices to maintain their profit margins.
Hyperinflation
This type of inflation occurs when the price level increases at an extremely high rate, typically more than 50% per month. Hyperinflation often occurs due to a rapid increase in the money supply, which leads to a decrease in the value of the currency.
Causes of Inflation
The causes of inflation are multifaceted and can be attributed to a variety of factors. One major cause is an increase in demand for goods and services, which drives up prices. Another cause is a decrease in the supply of goods and services, which creates scarcity and drives up prices
For instance, if more people want to buy a limited number of goods and services, then the price of those goods and services will rise. Similarly, if there are fewer goods and services available to purchase, then the price of those goods and services will also rise.
Additionally, inflation can be caused by increases in the cost of inputs such as labour or raw materials, which drive up the costs of producing goods and services.
Inflation can also be influenced by changes in government policies, such as monetary, fiscal, and trade policies. Finally, inflation can be influenced by expectations of future price increases, leading to hoarding and further price increases.
