Written by One of the most talked about macroeconomic variables is inflation.
Inflation may be defined as a rise in the general price level of goods and services in the economy.
We have already looked at the meaning, and characteristics of inflation, as well as the causes of inflation.
In this post, we will look at the different types of inflation.
Inflation may be classified under different headings. We can categorize inflation according to:
- rates or intensity
- Period of occurrence
- causes
- Government reaction
- Coverage
Types of Inflation according to Rate
On the basis of rate, inflation can be categorized into five, namely: creeping inflation, walking inflation, galloping inflation, running inflation, and hyperinflation.
Creeping inflation
Also known as mild inflation, creeping inflation is a mild form of inflation where the inflation rate rises at a slow rate.
It refers to a situation where the general price level in an economy gradually and consistently increases over time, typically at a slow pace.
Simply put, creeping occurs when the price changes in the economy are extremely small and slow.
Generally speaking, an inflation rate of 3% or less annually is categorized as creeping inflation.
Walking inflation
Also known as trotting inflation, walking inflation is a moderate form of inflation where the inflation rate rises at a moderate rate.
It refers to a situation where the inflation rate of a country is increasing at a moderate pace over a period of time.
Walking inflation is usually characterized by a moderate increase in prices, typically between 3% to 10% per year.
Running inflation
When rises in the prices of goods and services in an economy become more pronounced compared to creeping inflation and walking inflation, then running inflation is said to occur.
Running inflation may be defined as a stronger form of inflation where inflation rises at a more than moderate rate.
It describes a situation where the inflation rate rises strongly, between 10% to 20% per annum.
This type of inflation requires strong monetary policy by the central bank and the government to keep it under control.
If running inflation isn’t kept under control, it could turn into galloping inflation, which is even worse.
Galloping Inflation
Galloping inflation is a situation where the inflation rate rises rapidly, at a rate that is significantly higher than that of running or walking inflation.
This type of inflation is also known as jumping inflation. It occurs when prices rise by double digits in an economy.
Galloping inflation is usually characterized by a doubling of prices, typically between 20% to 100% per year.
This type of inflation is often associated with a loss of confidence in the currency of an economy because the purchasing power of money will decrease rapidly.
Once it sets in, galloping inflation may be very difficult to control. Even if the monetary authorities want to control it, they will have to use tighter monetary policies.
Hyperinflation
This is a dangerous form of inflation where prices rise at an alarming rate.
Hyperinflation is an economic condition characterized by a rapid and out-of-control increase in the prices of goods and services, usually at a rate of more than 50% per month.
In other words, it is an extreme form of inflation that occurs when prices rise very rapidly so that the value of the currency is eroded.
Hyperinflation can lead to a complete breakdown of an economy, with many consequences such as a loss of purchasing power of the currency, large devaluation of savings, and social unrest.
Types of Inflation according to Period of Occurrence
On the basis of occurrence, we can categorize inflation into war-time inflation, peace-time, and post-war inflation.
War-time inflation
As its name seems to suggest, war-time inflation is inflation that occurs during war-like situations.
It refers to the significant rise in prices during periods of war, often caused by increased demand and reduced supply.
During periods of war, the government expenditures on military goods and services increase significantly.
At the same time, productive activities will slow down since the available resources will be diverted to military purposes.
As a result, there will be a shortage of consumer goods, which will increase prices and result in wartime inflation.
So, basically, war-time inflation is caused by increased government spending on the military, reduced supply of consumer goods, and increased demand for consumer goods during war.
Post-war Inflation
This is an inflation that takes immediately after a wartime situation.
Post-war inflation refers to the sharp increase in prices after a period of war due to high demand and limited supply.
After war has ended, people increased their demand for goods and services, but the productive capacities to respond to such demand is limited due to the effect of war.
As a result, there will be shortage, resulting in post-war inflation.
Peace-time inflation
Peace-time inflation occurs when prices rise during a normal period of peace.
It is inflation that occurs during times of peace and economic stability, generally caused by an increase in demand for goods and services.
Peace-time inflation may also be caused by an increase in government expenditure on capital projects for a long period of time, most especially during developmental periods.
Types of Inflation according to causes
On the basis of causes, Inflation can be categorized into 8 types: Currency inflation, credit inflation, deficit-induced inflation, profit-induced inflation, wage-induced inflation, demand-pull inflation, scarcity inflation, and cost-push inflation.
Currency Inflation
This is inflation that occurs as a result of an expansion in the supply of printed money.
Currency inflation usually results when more currency becomes available, without a corresponding increase in the supply of goods and services so that the average prices of goods and services increases in an economy.
Currency inflation may also due to the excess of the supply of money over the demand for money in an economy.
Credit Inflation
Credit inflation is price increase in the goods and services that result from expansion of bank credits.
It is an inflation that results sanctions more loans and advances to the public than the economy actually needs.
When this happens, the aggregate demand will increases faster than the aggregate supply, resulting in an increase in the general price level.
In short, Credit inflation occurs due to excessive bank credits.
Deficit-induced inflation
This is caused as result of government spending in excess of its revenue.
Whenever government spends more than its earns, a deficit financing is required to fund the budget.
This means that the government will ask the central bank to expand money supply and credit provision.
The result is that more money will be pump into the economy, which may cause demand to increase significantly in relation to supply, so that the price level rises.
In short, deficit-induced inflation occurs when the government spends more than it earns, inc
Profit-induced inflation
Profit-induced inflation occurs when companies raise prices to increase their profit margins, regardless of their production costs.
It may also occurs when the government sets price floors in a bid to protect the interest of consumers.
Wage-induced inflation
This occurs when an increases in wages results in an increase in the production costs, which ultimately results in increase in prices.
Wage-induced is usually the direct result of increase in money wages in relation to the efficiency of the workers.
That is, it results when the rise in wages is not accompanied by an increases in output, so that prices rises.
Scarcity Inflation
Scarcity inflation occurs where prices rise due to a shortage of goods or services in the economy
Generally speaking, scarcity inflation occurs due to hoarding, which is a situation where unscrupulous traders and black markets accumulate and hold unto large stocks of goods in hopes of selling them at higher prices in the future.
When goods are hoarded, there will be a shortage in the economy, which will cause their prices to increase significantly. This prices increase is what gives birth to scarcity inflation.
However, it should be noted that scarcity inflation will only occur when the shortages of good is widespread in the economy.
If the shortage affects only a part of the economy, it may not result in scarcity inflation.
Demand-pull Inflation
This is a common type of inflation that results when aggregate demand exceeds aggregate supply so that the prices of goods and services rise in an economy.
In other words, demand-pull inflation is the price increase that results when aggregate demand rises faster than aggregate supply.
Factors that can cause demand-pull inflation are:
- Increase in consumer spending
- Increase in government spending
- Increase in population
- Increase in disposable income
- Increase in exports relative to imports
- Increase in business spending
Demand-Pull inflation gives rise to a situation often economists describe as “Too much money chasing too few goods”.
Cost-push Inflation
Cost-push inflation occurs when the prices of goods and services rise as a result of an increase in the cost of production.
It occurs when prices of goods and services rise due to an increase in the cost of production inputs, such as labour, raw materials, or energy.
When the cost of these inputs increases, businesses may raise their prices to maintain their profit margins, which in turn can lead to inflation.
Types of inflation on the basis of Government Reaction
Inflation can be categorized into two based on government reaction, namely; open inflation and suppressed inflation.
Open Inflation
This is an inflation that occurs when government does not make any attempt to control the inflation.
In other words, open inflation occurs when government do not make any attempt to restrict inflation.
Whenever prices rise without any interruption by the concerned government, then open inflation is said to exist.
Open inflation is usually associated with a open or free-market economy where government or the monetary authorities do not control prices
In such economy, prices are allowed to take its own course, which may result in open inflation
Suppressed Inflation
Suppressed inflation refers to the economic conditions in which the government interferes directly with the price system through controls.
Ir results where government uses price controls, limits on consumption, and control of investment to control the prices of products and services.
As the government tries to control prices, it result in hoarding of goods and black market activities.
In the black market, goods are sold at a higher price than in the controlled market. This rise in price in the black market will eventually cause an increase in the prices of controlled market, resulting in suppressed inflation.
Suppressed inflation is also known as repressed inflation.
Types of Inflation according to Coverage
Based on inflation, inflation can be categorized into comprehensive and sporadic inflation.
Comprehensive Inflation
As its name might seems to suggest, comprehensive inflation occurs when all prices of goods in an economy
It is an inflation that affect all commodities in an economy. When comprehensive inflation, all prices of goods rises without any exception.
Because comprehensive inflation affects commodities economy-wide, it is also known as economy-wide inflation.
Sporadic Inflation
This occurs when prices of few goods rises in some specific region in an economy.
Sporadic inflation is usually structural and sectional in nature in that it only affect some commodities in the economy.
It may arise when supply is restricted by physical conditions and cannot be increased quickly.
