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Inflation: Some Types of Inflation

Inflation is a sustained increase in the general price level over time that reduces the purchasing power of currency. There are different types including moderate, running, galloping, and hyper inflation. Countries measure inflation using indices like the Wholesale Price Index (WPI) and Consumer Price Index (CPI). Central banks use tools like increasing interest rates, cash reserve ratios, and repo/reverse repo rates to control inflation. Effects of inflation include initially stimulating the economy but eventually reducing living standards, harming trade, and discouraging savings.

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Trishala S Maheshwari
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106 views4 pages

Inflation: Some Types of Inflation

Inflation is a sustained increase in the general price level over time that reduces the purchasing power of currency. There are different types including moderate, running, galloping, and hyper inflation. Countries measure inflation using indices like the Wholesale Price Index (WPI) and Consumer Price Index (CPI). Central banks use tools like increasing interest rates, cash reserve ratios, and repo/reverse repo rates to control inflation. Effects of inflation include initially stimulating the economy but eventually reducing living standards, harming trade, and discouraging savings.

Uploaded by

Trishala S Maheshwari
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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INFLATION

Inflation is a situation of substantial and rapid increase in the level of prices and
consequent deterioration in the value of money over a period of time. In general it
reduces the value of money or its purchasing power over a period of time.

Some Types of Inflation:


Moderate Inflation: It occurs when the prices are rising slowly; it does not
disrupt the economic balance. It is regarded as stable type of inflation as the prices
do not get far out of line.

Running Inflation: When the movement of prices increases rapidly it is called


running inflation; it may record more than 100% rise in prices over a decade, more
than 10% per year.

Galloping Inflation: When the prices rise by double or triple digit over 100% to
200% per year it is regarded as galloping inflation. This is a serious problem it
causes economic distortion and disturbances.

Hyper Inflation: Here the rise in prices is severe it’s over 1000% or even more
per year, there is at least a 50% price in a month. It is regarded as a monetary
disease.

Wholesale Price Index:


The Wholesale Price Index (WPI) is the price of a representative basket of
wholesale goods. Countries like India use WPI changes as a central measure of
inflation. However, India and the United States now report a producer price index
instead. The wholesale price index consists of over 2,400 commodities. The
indicator tracks the price movement of each commodity individually

The WPI is the price of a representative basket of wholesale goods. Some countries
use the changes in this index to measure inflation in their economies, in particular
India – The Indian WPI figure is released weekly on every Thursday and
influences stock and fixed price markets. The purpose of the WPI is to monitor
price movements that reflect supply and demand in industry, manufacturing and
construction

Consumer Price Index:


A consumer price index (CPI) measures changes in the price level of consumer
goods and services purchased by households.

The annual percentage change in a CPI is used as a measure of inflation. A CPI can
be used to index (i.e., adjust for the effect of inflation) the real value of wages,
salaries, pensions, for regulating prices and for deflating monetary magnitudes to
show changes in real values.

Monetary Inflation: Monetary inflation is a sustained increase in the money


supply of a country; it means there is excessive liquidity of money in the market
which in return can lead to rise in the prices of commodities.

Price Inflation: Monetary inflation usually results in price inflation which is a


rise in the general level of prices of goods and services. Originally the term
"inflation" was used to refer only to monetary inflation, whereas in present usage it
usually refers to price inflation.
Necessary measures to control inflation
1) Increase in Interest Rates: The central bank increases the bank rate. With
this the cost of borrowing of commercial banks from central bank also increase so
the commercial banks charge higher rate of interest on loans. This discourages
borrowings and thereby helps to reduce the money circulation in the market.

2) Increase In cash Reserve Ratio (CRR): CRR means the minimum retention
of cash reserves which commercial banks have to maintain with the central bank.
To control inflation, the central bank raises the CRR which reduces the lending
capacity of the commercial banks. Consequently, flow of money from commercial
banks to public decreases.

3) Increase In Reverse Repo Rate (RRR): Reverse Repo rate is the rate at
which Reserve Bank of India borrows money from banks. Banks are always happy
to lend money to RBI since their money is in safe hands with a good interest. An
increase in Reverse repo rate can causes the banks to transfer more funds to RBI
due to these attractive interest rates. It causes the money to be drawn out of the
banking system.

4) Structural Liquidity Ratio: It is the amount of liquid assets, such as cash,


precious metals or other short-term securities, that a financial institution must
maintain in its reserves. The statutory liquidity ratio is a term most commonly used
in India SLR restricts the bank’s leverage in pumping more money into the
economy.

5)Bank Rate: Bank rate is the interest rate at which central bank advances short
term loans to commercial banks .changes in bank rate are reflected in the prime
lending rates offered by commercial banks to their customers. The bank rate
signals the central bank’s long-term outlook on interest rates. If the bank rate
moves up, long-term interest rates also tend to move up, and vice-versa.

Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and
Reverse Repo rate our banks adjust their lending or investment rates for common
man.
Some Effects Of Inflation
1) Stimulating or Favorable Effect: It has been observed that mild inflation or
gently rising prices have a stimulating or a tonic effect on the economy. When
price rise profits increases, investment increases that generates income and creates
employment as a results output expands. This process continues up to the point of
full employment

2)Effects the Standard Of Living: Inflation not only disrupts the economy but
also disrupts the budget and standard of living of the people especially the middle
and the lower income group. Inflation reduces the economic welfare of the fixed
income groups as the price raises the purchasing power of money falls hence the
people get a smaller amount of goods services or low quality for the same amount
of money. As a result their consumption would fall and the standard of living.

3)Effects Foreign Trade: Inflation affects adversely the Country’s balance of


payments situation when prices are raising foreign demand for our goods fall and
exports declined due to high prices, domestic consumers buy foreign goods and
imports rise hence it leads to unfavorable balance of payments.

4) Discourages saving and Other Effects: Uncontrolled inflation leads to


discouragement in savings due to falling value of money. Energies of business
community are diverted to speculation and making quick profits rather than
genuine production, Consumers suffers as seller’s market will be developed if
price of all type of goods rise of any quality.

5) Effects On Manufacturers: Inflation is harmful to trade. Manufacturers


generally sell goods on credit. When they seek repayment they find that the money
they receive is less than they expected. They therefore become reluctant to trade.

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