kalpeshjain
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ACCORDING TO THE RATE OF INFLATION.
1. Moderate, Gal1oping and Hyperinflation
The severity of inflation is often measured in terms of the rapidity of price rise. On the basis, a quantitative distinction of inflation may be nude into three categories, viz: Moderate inflation; Running and galloping inflation; and Hyperinflation.
a. Moderate Inflation
It is a mild and tolerable form of inflation. It occurs when prices are rising slowly When the rate of inflation is less than 10 per cent annually, or it is a single digit int1ation rate, it is considered to be a moderate inflation in the present the economy.
Prof. Samuelson observes that moderate inflation is typical today in most industrialized countries. The following are the major characteristics of moderate inflation:
i. There is a single digit inflation rate (less than 10 per cent) annually.
ii. It does not disrupt the economic balance.
iii. It is regarded as stable Inflation in which the relative prices do not get far out of line.
iv. People’s expectations remain more or less stable under moderate inflation
v. Under a low inflation rate, the real interest rate is not too low or negative, so money can serve its role as a store of value without difficulty.
vi. There are modest inefficiencies associated with moderate inflation.
Economists have arbitrarily laid down that a 3-4 per cent price rise per annum is a tolerable rate of inflation in modern economies. Even the Chakravarthi Report of the Reserve Bank of India has accepted 3-4 per cent rate of inflation annually to be an efficient and tolerable norm for the Indian economy. Incidentally, some economists have described up to 3 per cent annual rate of inflation as ‘creeping inflation’ and if it exceeds 10 per cent, it is called ‘walking inflation.’ This means, Samuelson has clubbed ‘creeping’ and ‘walking’ inflation into ‘moderate’ inflation. Samuelson’s opinion, moderate inflation is not a serious problem. While some economists feel that even a walking inflation should make us more cautious, as it represents a warning signal for the occurrence of running or double digit and eventually a galloping inflation, if it is not checked in time.
b. Running and Galloping Inflation
When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. Economists have not described the range of running inflation. But, we may say that a double digit inflation of 10-20 per cent per annum is a running inflation. If it exceeds that figure, it may be called ‘galloping’ inflation. According to Samuelson, when prices are rising at double or triple digit rates of 20, 100 or 200 per cent a year, the situation is described as ‘galloping’ inflation. Indian economy has witnessed a sort of ‘running’ and ‘galloping’ inflation to some extent (not exceeding 25 per cent per annum) during the planning era, since the Second Plan period. Argentina, Brazil and Israel, for instance, have experienced inflation rates over 100 per cent in the eighties. Galloping inflation is really a serious problem. It causes economic distortions and disturbances.
c. Hyperinflation
In the case of hyperinflation, prices rise every movement, and there is no limit to the height to which prices might rise. Therefore, it is difficult to measure its magnitude, as prices ris~ by fits and starts. . In quantitative terms, when prices rise over 1000 per cent in a year, it is called a hyperinflation. Austria, Hungary, Germany, Poland and Russia witnessed hyperinflation in the wake of World War I. Hyperinflation notably took place in Germany in 1920-1923. The German price index rose from 1 to 10,00,000,000 during
January 1922 to November 1923. Believe it or not, it is a fact!
The Main Features of Hyperinflation are
I. During hyperinflation, the price rise is severe. The price index moves up by leaps and bounds. It is over 1000 per cent per year. There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 times.
ii. It represents the most pathetic deterioration in people’s purchasing power.
iii. It is apparently generated by a massive fiscal dislocation.
iv. It is amplified by wage-price spiral.
v. Hyperinflation is a monetary disease.
vi. The velocity of circulation of money increases very fast.
vii. The structure of the relative prices of goods become highly unstable.
viii. The real wages tend to decline fast.
ix. Inequalities increase.
x. Overall economic distortions take place.
ACCORDING TO THE NATURE OF THE TIME PERIOD OF OCCOURANCE.
2. War, Post-War and Peace-Time Inflation
On the basis of the nature of time-period of occurrence, we have:
• War-time inflation;
• Post-war inflation; and
• Peace-time inflation.
a. War-Time Inflation
It is the outcome of certain exigencies of war, on account of increased government expenditure on defense which is of an unproductive nature. By such public expenditure, the government apportions a substantial production of goods and services out of total availability for war which causes a downward shift in the supply; as a result, an inflationary gap may develop.
b. Post-war Inflation
It is a legacy of war. In the immediate post-war period, it is usually experienced. This may happen when the disposable income of the community increases, when war-time taxation is withdrawn or public debt is repaid in the post-war period.
c. Peace-time Inflation
By this is meant the rise in prices during the normal period of peace. Peacetime inflation is often a result of increased government outlays on capital projects having a long gestation period; so a gap between money income and real wage goods develops. In a planning era, thus, when government’s expenditure increases, prices may rise.
ACCORDING TO THE SCOPE AND COVERAGE.
3. Comprehensive and Sporadic Inflation
• From the coverage or scope point of view, we have:
• Comprehensive or economy-wide inflation, and
• sporadic inflation.
a. Comprehensive Inflation
When prices of every commodity throughout the economy rise, it is called economy-wide or comprehensive inflation. It is a normal inflationary phenomenon and refers to a rise in the General Price level
b. Sporadic Inflation
This is a kind of sectional inflation. It consists of cases in which the averages of a group of prices rise because of increases in individual prices due to abnormal shortage of specific goods. When the supplies of some goods become inelastic, at least temporarily, due to physical or structural constraints, sporadic inflation has its sway. For instance, during drought conditions when there is a failure of crops, food grain prices shoot up. Sporadic inflation is a situation in which direct price control, if skillfully used, is most likely to be beneficial to the community at large.
ACCORDING TO THE GOVERNMENT REACTION.
4. Open and Repressed Inflation
Inflation is open or repressed according to the government’s reaction to the prevalence of inflationary forces in the economy.
a. Open Inflation
When the government does not attempt to prevent a price rise, inflation is said to be open. Thus, inflation is open when prices rise without any interruption. In open inflation, the free market mechanism is permitted to fulfill its historic function of rationing the short supply of goods and distribute them according to consumer’s ability to pay. Therefore, the essential characteristics of an open inflation lie in the operation of the price mechanism as the sole distributing agent. The post-war hyperinflation during the twenties in Germany is a living Example of open inflation.
b. Repressed Inflation
When the government interrupts a price rise, there is a repressed or suppressed’ inflation. Thus, suppressed inflation refers to those conditions in which price increases are prevented at the present time through an adoption of certain measures like price controls and rationing by the government, but they rise on the removal of such controls and rationing. The essential characteristic of repressed inflation, in contrast to open inflation, is that the former seeks to prevent distribution through price rise under free market mechanism and substitutes instead a distribution system based on controls. Thus, the administration of controls is an important feature of suppressed Inflation . However, many economists like Milton and G.N.Halm opine that if there has to be any inflation, it is better open than suppressed. Suppressed inflation is condemned as it breeds number of evils like black market, hierarchy of price controllers and rationing officers, and uneconomic diversion of productive resources from essential industries to non-essential or less essential goods industries since there is a free price movement in the latter and hence are more profitable to investors.
ACCORDING TO THE CAUSE
a. Credit Inflation.
Inflation which is caused by excessive expansion of bank credit or money supply is referred to as credit or money inflation.
b. Deficit Inflation.
It is the inflation caused by deficit financing. When the government budgets contain heavy deficit financing, through creating new money, the purchasing power in the community increases and prices rise. This may be referred as to as deficit-induced inflation. During a planning era, when government launches upon heavy investment, it usually resorts to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when the production of consumption goods fails to keep pace with the increased money expenditure.
c. Scarcity Inflation.
Whenever scarcity of real goods occurs or may be artificially created by the hoarding activities of unscrupulous traders and speculators which may result into black-marketing, thereby causing prices to go up, such type of inflation may be described
as scarcity inflation.
d. Profit Inflation.
In his recent book, Growth less Inflation by Means of Stockless Money, Prof. Brahmananda profit inflation is a unique category of inflation. The concept of profit inflation was originated by Keynes in his Treatise on Money. According to Keynes, the price level of consumption goods is a function of the investment exceeding savings. He considered the investment boom as a reflection of profit boom. Inflation is unjust in its distribution effect. It redistributes income in favor of profiteers and against the wage-earning class. During inflation, thus, the entrepreneur class may tend to expect an upward shifting of the marginal efficiency of capital (MEC); hence, entrepreneurs are induced to invest more even by borrowing at higher interest rates. Eventually, investment exceeds savings and economy tends to reach a higher level of money income equilibrium. If economy is operating at full employment level or if there are bottlenecks of market imperfections, real output will not rise proportionately, so the imbalance between money income and real income is corrected through rising prices.
e. Foreign-Trade Induced Inflation.
For an international economy, we may categorize the following two types of inflation as being caused by factors pertaining to the balance of payments.
i. Export-Boom Inflation; and
ii. Import Price-hike Inflation.
i. Export-Boom Inflation.
When a country having a sizeable export component in its foreign trade experiences a sudden rise in the demand for its exportable against the inelastic supply of exportable in the domestic market, it obviously implies an excessive pressure of demand which is revealed in terms of persistent inflation at home. Again, trade gains and sudden influx of exchange remittances may lead to an increase in monetary liabilities which is further reflected in the rising pressure of demand for domestic output causing an inflationary spiral to get further momentum. Such a permanent case for export-boom inflation is, not however, ruled out in the Indian economy, because neither export trade is a significant portion of Domestic National Product nor is there a continuous boom of export-demand, causing tens of trade to move up favorably all the time.
ii. Import Price-hike Inflation.
When prices of import components rise due to inflation abroad, the domestic costs and prices of goods using these imported parts will tend to rise. Such inflation is referred to as imported inflation. For instance, hike in oil prices by the Arab countries was responsible for accelerating. Inflationary price rise in many oil-importing countries, including India to some extent.
j. Tax Inflation.
Year to year increase in commodity taxation such as excise duties and sales tax may lead to rise in prices of taxed goods. Such inflation is termed as tax inflation or tax-induced inflation.
g. Cost Inflation.
When inflation emerges on account of a rise in cost factor, it is called cost inflation. It occurs when money incomes (wage rate, particularly) expand more than real productivity. Cost inflation has its course through the level of money costs of the factors of production and in particular through the level of wage rates. Due to a rising cost of living index, workers demand high wages, and higher wages in their turn increase the cost of production, which a producer generally meets by raising prices. This process of spiraling may each higher and higher level. In this case, however, cyclical anti-inflation remedies of monetary controls are not relative effective. Wage inflation is an important variant of cost inflation. Wage push inflation occurs when money wages are raised without corresponding improvement in the productivity of the workers.
h. Demand Inflation.
When there is an excess of aggregate, demand against the available aggregate supply of goods and services, prices tend to rise. It is called demand-induced inflation. Population-growth, rising money income, etc. forces play a significant role in generating demand inflation.
ACCORDING TO THE SCHOOL OF THOUGHTS
Demand-Pull vs. Cost-Push Inflation
Broadly speaking, there are two schools of thought regarding the possible causes of inflation. One school views the demand-pull element as an important cause of inflation, while the other group of economists holds that inflation is mainly caused by the cost-push element.
a. Demand-Pull Inflation
According to the demand-pull theory, prices rise in response to an excess of aggregate demand over existing supply of goods and services. The demand-pull theorists point out that inflation (demand-pull) might be caused, in the first place, by an increase in the quantity of money, when the economy is operating at full employment level. As the quantity of money increases, the rate of interest will fall and, consequently, investment will increase. This increased investment expenditure will soon increase the income of the various factors of production. As a result, aggregate consumption expenditure will increase leading to an effective increase in the effective demand. With the economy already operating at the level of full employment, this will immediately raise prices, and inflationary forces may emerge. Thus, when the general monetary demand rises faster than the general supply, it pulls up prices (commodity prices as well as factor prices, in general). Demand-pull inflation, therefore, manifest itself when there is active cooperation, or passive collusion, or a failure to take counteracting measures by monetary authorities. Demand-pull or just demand inflation may be defined as a situation where the total monetary demand persistently exceeds total supply of real goods and services at current prices, so that prices are pulled upwards by the continuous upward shift of the aggregate demand function.
Causes of Demand-Pull Inflation
It should be noted that the concept of demand-pull inflation is associated with a situation of full employment where increase in aggregate demand cannot be met by a corresponding expansion in the supply of real output. There can be many reasons for such excess monetary demand:
1. Increase in Public Expenditure. There may be an increase in the public expenditure (G) in excess of public revenue. This might have been made possible (or rendered necessary) through public borrowings from banks or through deficit financing, which implies an increase in the money supply.
2. Increase in Investment. There may be an increase in the autonomous investment (iI in firms, which is in excess of the current savings in the economy. Hence, the flow of total expenditure tends to rise, causing an excess monetary demand, leading to an upward pressure on prices.
3. Increase in MPC. There may be an increase in the marginal propensity to consume (MPC), causing an excess monetary demand. This could be due to the operation of demonstration effect and such other reasons.
4. Increasing Exports and Surplus Balance of Payments. In an open economy, an increasing surplus in the balance of payments also leads to an excess demand. Increasing exports also have an inflationary impact because there is generation of money income in the home economy due to export earnings but, simultaneously, there is reduction in
the domestic supply of goods because products are exported. If an export surplus is not balanced by increased savings, or through taxation, domestic spending will be in excess of the value of domestic output, marketed at current prices.
5. Diversification of Goods. A diversion of resources from the consumption goods sector either to the capital goods sector or the military sector (for producing war goods) will lead to an inflationary pressure because while the generation of income and expenditure continues, the current flow of real—output decreases on account of high gestation period involved in these sectors. Again, the opportunity cost of war goods is quite high in terms of consumption goods meant for the civilian sector. This leads to an excessive monetary demand for the goods and services against their real supply, causing the prices to move up.
In short, it is said that the demand-pull inflation could be averted through deflationary measures adopted by the monetary and fiscal authorities. Thus, passive policies are responsible for demand-pull inflation.
b. Cost-Push Inflation
A group of economists hold the opposite view that the process of inflation is initiated not by an excess of general demand but by an increase in costs, as factors of production try to increase their share of the total product by raising their prices. Thus, it has been viewed that a rise in prices is initiated by growing factor costs. Therefore, such a price rise is termed as “cost-push” inflation as prices are being pushed up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage inflation process. It is believed that wages constitute nearly seventy per cent of the total cost of production. This is especially true for a country like India, where labour intensive techniques are commonly used. Thus, a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level, because fundamentally, prices are based on costs. It has been said that a rise in wages causing a rise in prices may, in turn, generate an inflationary spiral because an increase would motivate the workers to demand higher wages. Indeed, any autonomous increase in costs, such .1S a rise in the prices of imported components or an increase in indirect taxes (excise duties, etc.), may initiate a cost-push inflation. Basically, however, it is wage-push pressures which tend to accelerate the rising price spiral.
Cost-push inflation may occur either due to wage-push or profit-push. Cost-push analysis assumes monopoly elements either in the labour market or in the product market. When there are monopolistic labour organizations, prices may rise due to wage-push. And, when there are monopolies in the product market, the monopolists may be induced to raise the prices. In order to fetch high profits. Then, there is profit-push in raising the prices. However, the cost-push hypothesis rarely considers autonomous attempts to increase profits as an important inflationary element. Firstly, because profits are generally a small fraction of the total price, a rise in profits would have only a slight impact on prices. Secondly, the monopolists generally hesitate to raise prices in absence of obvious demand-pull elements. Finally, the motivation for profit-push is weak since, at least in corporations, those who make the decision to raise prices are not the direct beneficiaries of the price increase. Hence cost-push is generally conceived as a synonymous with wage-push. When wages are pushed up, cost of production increases to a considerable extent so that prices may rise. Since wages are pushed up by the demand for high wages by the labor unions, wage-push may be .equated with union-push. According to one variant of the cost-push theory, sectoral shifts in demand are prime-movers in the inflationary process. Starting with an autonomous shift in demand, a rise in wages and prices could result in one sector and this rise could elicit further shifts of demand. This happens because there is a close link between different goods through inputs. One good serves as an input in the production of the other goods, and consequently, when the price of the input rises, the prices of output will also rise. For instance, when due to a rise in wages in the steel industry, price of steel may rise, and this will raise the prices of vehicles, machines, etc., using Steel as input. The rise in the prices of vehicles may in turn raise the cost of transport and manufactured goods. Similarly, prices of tractors, etc. may increase due to high prices of steel so that costs of agriculture may raise, hence food and raw material prices will also rise. All these ultimately raise the cost of living, leading to increase in wage rates. Thus, inflation once sets in motion due to the phenomenon of cost-push in one industry or sector spreads throughout the economy.
1. Moderate, Gal1oping and Hyperinflation
The severity of inflation is often measured in terms of the rapidity of price rise. On the basis, a quantitative distinction of inflation may be nude into three categories, viz: Moderate inflation; Running and galloping inflation; and Hyperinflation.
a. Moderate Inflation
It is a mild and tolerable form of inflation. It occurs when prices are rising slowly When the rate of inflation is less than 10 per cent annually, or it is a single digit int1ation rate, it is considered to be a moderate inflation in the present the economy.
Prof. Samuelson observes that moderate inflation is typical today in most industrialized countries. The following are the major characteristics of moderate inflation:
i. There is a single digit inflation rate (less than 10 per cent) annually.
ii. It does not disrupt the economic balance.
iii. It is regarded as stable Inflation in which the relative prices do not get far out of line.
iv. People’s expectations remain more or less stable under moderate inflation
v. Under a low inflation rate, the real interest rate is not too low or negative, so money can serve its role as a store of value without difficulty.
vi. There are modest inefficiencies associated with moderate inflation.
Economists have arbitrarily laid down that a 3-4 per cent price rise per annum is a tolerable rate of inflation in modern economies. Even the Chakravarthi Report of the Reserve Bank of India has accepted 3-4 per cent rate of inflation annually to be an efficient and tolerable norm for the Indian economy. Incidentally, some economists have described up to 3 per cent annual rate of inflation as ‘creeping inflation’ and if it exceeds 10 per cent, it is called ‘walking inflation.’ This means, Samuelson has clubbed ‘creeping’ and ‘walking’ inflation into ‘moderate’ inflation. Samuelson’s opinion, moderate inflation is not a serious problem. While some economists feel that even a walking inflation should make us more cautious, as it represents a warning signal for the occurrence of running or double digit and eventually a galloping inflation, if it is not checked in time.
b. Running and Galloping Inflation
When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. Economists have not described the range of running inflation. But, we may say that a double digit inflation of 10-20 per cent per annum is a running inflation. If it exceeds that figure, it may be called ‘galloping’ inflation. According to Samuelson, when prices are rising at double or triple digit rates of 20, 100 or 200 per cent a year, the situation is described as ‘galloping’ inflation. Indian economy has witnessed a sort of ‘running’ and ‘galloping’ inflation to some extent (not exceeding 25 per cent per annum) during the planning era, since the Second Plan period. Argentina, Brazil and Israel, for instance, have experienced inflation rates over 100 per cent in the eighties. Galloping inflation is really a serious problem. It causes economic distortions and disturbances.
c. Hyperinflation
In the case of hyperinflation, prices rise every movement, and there is no limit to the height to which prices might rise. Therefore, it is difficult to measure its magnitude, as prices ris~ by fits and starts. . In quantitative terms, when prices rise over 1000 per cent in a year, it is called a hyperinflation. Austria, Hungary, Germany, Poland and Russia witnessed hyperinflation in the wake of World War I. Hyperinflation notably took place in Germany in 1920-1923. The German price index rose from 1 to 10,00,000,000 during
January 1922 to November 1923. Believe it or not, it is a fact!
The Main Features of Hyperinflation are
I. During hyperinflation, the price rise is severe. The price index moves up by leaps and bounds. It is over 1000 per cent per year. There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 times.
ii. It represents the most pathetic deterioration in people’s purchasing power.
iii. It is apparently generated by a massive fiscal dislocation.
iv. It is amplified by wage-price spiral.
v. Hyperinflation is a monetary disease.
vi. The velocity of circulation of money increases very fast.
vii. The structure of the relative prices of goods become highly unstable.
viii. The real wages tend to decline fast.
ix. Inequalities increase.
x. Overall economic distortions take place.
ACCORDING TO THE NATURE OF THE TIME PERIOD OF OCCOURANCE.
2. War, Post-War and Peace-Time Inflation
On the basis of the nature of time-period of occurrence, we have:
• War-time inflation;
• Post-war inflation; and
• Peace-time inflation.
a. War-Time Inflation
It is the outcome of certain exigencies of war, on account of increased government expenditure on defense which is of an unproductive nature. By such public expenditure, the government apportions a substantial production of goods and services out of total availability for war which causes a downward shift in the supply; as a result, an inflationary gap may develop.
b. Post-war Inflation
It is a legacy of war. In the immediate post-war period, it is usually experienced. This may happen when the disposable income of the community increases, when war-time taxation is withdrawn or public debt is repaid in the post-war period.
c. Peace-time Inflation
By this is meant the rise in prices during the normal period of peace. Peacetime inflation is often a result of increased government outlays on capital projects having a long gestation period; so a gap between money income and real wage goods develops. In a planning era, thus, when government’s expenditure increases, prices may rise.
ACCORDING TO THE SCOPE AND COVERAGE.
3. Comprehensive and Sporadic Inflation
• From the coverage or scope point of view, we have:
• Comprehensive or economy-wide inflation, and
• sporadic inflation.
a. Comprehensive Inflation
When prices of every commodity throughout the economy rise, it is called economy-wide or comprehensive inflation. It is a normal inflationary phenomenon and refers to a rise in the General Price level
b. Sporadic Inflation
This is a kind of sectional inflation. It consists of cases in which the averages of a group of prices rise because of increases in individual prices due to abnormal shortage of specific goods. When the supplies of some goods become inelastic, at least temporarily, due to physical or structural constraints, sporadic inflation has its sway. For instance, during drought conditions when there is a failure of crops, food grain prices shoot up. Sporadic inflation is a situation in which direct price control, if skillfully used, is most likely to be beneficial to the community at large.
ACCORDING TO THE GOVERNMENT REACTION.
4. Open and Repressed Inflation
Inflation is open or repressed according to the government’s reaction to the prevalence of inflationary forces in the economy.
a. Open Inflation
When the government does not attempt to prevent a price rise, inflation is said to be open. Thus, inflation is open when prices rise without any interruption. In open inflation, the free market mechanism is permitted to fulfill its historic function of rationing the short supply of goods and distribute them according to consumer’s ability to pay. Therefore, the essential characteristics of an open inflation lie in the operation of the price mechanism as the sole distributing agent. The post-war hyperinflation during the twenties in Germany is a living Example of open inflation.
b. Repressed Inflation
When the government interrupts a price rise, there is a repressed or suppressed’ inflation. Thus, suppressed inflation refers to those conditions in which price increases are prevented at the present time through an adoption of certain measures like price controls and rationing by the government, but they rise on the removal of such controls and rationing. The essential characteristic of repressed inflation, in contrast to open inflation, is that the former seeks to prevent distribution through price rise under free market mechanism and substitutes instead a distribution system based on controls. Thus, the administration of controls is an important feature of suppressed Inflation . However, many economists like Milton and G.N.Halm opine that if there has to be any inflation, it is better open than suppressed. Suppressed inflation is condemned as it breeds number of evils like black market, hierarchy of price controllers and rationing officers, and uneconomic diversion of productive resources from essential industries to non-essential or less essential goods industries since there is a free price movement in the latter and hence are more profitable to investors.
ACCORDING TO THE CAUSE
a. Credit Inflation.
Inflation which is caused by excessive expansion of bank credit or money supply is referred to as credit or money inflation.
b. Deficit Inflation.
It is the inflation caused by deficit financing. When the government budgets contain heavy deficit financing, through creating new money, the purchasing power in the community increases and prices rise. This may be referred as to as deficit-induced inflation. During a planning era, when government launches upon heavy investment, it usually resorts to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when the production of consumption goods fails to keep pace with the increased money expenditure.
c. Scarcity Inflation.
Whenever scarcity of real goods occurs or may be artificially created by the hoarding activities of unscrupulous traders and speculators which may result into black-marketing, thereby causing prices to go up, such type of inflation may be described
as scarcity inflation.
d. Profit Inflation.
In his recent book, Growth less Inflation by Means of Stockless Money, Prof. Brahmananda profit inflation is a unique category of inflation. The concept of profit inflation was originated by Keynes in his Treatise on Money. According to Keynes, the price level of consumption goods is a function of the investment exceeding savings. He considered the investment boom as a reflection of profit boom. Inflation is unjust in its distribution effect. It redistributes income in favor of profiteers and against the wage-earning class. During inflation, thus, the entrepreneur class may tend to expect an upward shifting of the marginal efficiency of capital (MEC); hence, entrepreneurs are induced to invest more even by borrowing at higher interest rates. Eventually, investment exceeds savings and economy tends to reach a higher level of money income equilibrium. If economy is operating at full employment level or if there are bottlenecks of market imperfections, real output will not rise proportionately, so the imbalance between money income and real income is corrected through rising prices.
e. Foreign-Trade Induced Inflation.
For an international economy, we may categorize the following two types of inflation as being caused by factors pertaining to the balance of payments.
i. Export-Boom Inflation; and
ii. Import Price-hike Inflation.
i. Export-Boom Inflation.
When a country having a sizeable export component in its foreign trade experiences a sudden rise in the demand for its exportable against the inelastic supply of exportable in the domestic market, it obviously implies an excessive pressure of demand which is revealed in terms of persistent inflation at home. Again, trade gains and sudden influx of exchange remittances may lead to an increase in monetary liabilities which is further reflected in the rising pressure of demand for domestic output causing an inflationary spiral to get further momentum. Such a permanent case for export-boom inflation is, not however, ruled out in the Indian economy, because neither export trade is a significant portion of Domestic National Product nor is there a continuous boom of export-demand, causing tens of trade to move up favorably all the time.
ii. Import Price-hike Inflation.
When prices of import components rise due to inflation abroad, the domestic costs and prices of goods using these imported parts will tend to rise. Such inflation is referred to as imported inflation. For instance, hike in oil prices by the Arab countries was responsible for accelerating. Inflationary price rise in many oil-importing countries, including India to some extent.
j. Tax Inflation.
Year to year increase in commodity taxation such as excise duties and sales tax may lead to rise in prices of taxed goods. Such inflation is termed as tax inflation or tax-induced inflation.
g. Cost Inflation.
When inflation emerges on account of a rise in cost factor, it is called cost inflation. It occurs when money incomes (wage rate, particularly) expand more than real productivity. Cost inflation has its course through the level of money costs of the factors of production and in particular through the level of wage rates. Due to a rising cost of living index, workers demand high wages, and higher wages in their turn increase the cost of production, which a producer generally meets by raising prices. This process of spiraling may each higher and higher level. In this case, however, cyclical anti-inflation remedies of monetary controls are not relative effective. Wage inflation is an important variant of cost inflation. Wage push inflation occurs when money wages are raised without corresponding improvement in the productivity of the workers.
h. Demand Inflation.
When there is an excess of aggregate, demand against the available aggregate supply of goods and services, prices tend to rise. It is called demand-induced inflation. Population-growth, rising money income, etc. forces play a significant role in generating demand inflation.
ACCORDING TO THE SCHOOL OF THOUGHTS
Demand-Pull vs. Cost-Push Inflation
Broadly speaking, there are two schools of thought regarding the possible causes of inflation. One school views the demand-pull element as an important cause of inflation, while the other group of economists holds that inflation is mainly caused by the cost-push element.
a. Demand-Pull Inflation
According to the demand-pull theory, prices rise in response to an excess of aggregate demand over existing supply of goods and services. The demand-pull theorists point out that inflation (demand-pull) might be caused, in the first place, by an increase in the quantity of money, when the economy is operating at full employment level. As the quantity of money increases, the rate of interest will fall and, consequently, investment will increase. This increased investment expenditure will soon increase the income of the various factors of production. As a result, aggregate consumption expenditure will increase leading to an effective increase in the effective demand. With the economy already operating at the level of full employment, this will immediately raise prices, and inflationary forces may emerge. Thus, when the general monetary demand rises faster than the general supply, it pulls up prices (commodity prices as well as factor prices, in general). Demand-pull inflation, therefore, manifest itself when there is active cooperation, or passive collusion, or a failure to take counteracting measures by monetary authorities. Demand-pull or just demand inflation may be defined as a situation where the total monetary demand persistently exceeds total supply of real goods and services at current prices, so that prices are pulled upwards by the continuous upward shift of the aggregate demand function.
Causes of Demand-Pull Inflation
It should be noted that the concept of demand-pull inflation is associated with a situation of full employment where increase in aggregate demand cannot be met by a corresponding expansion in the supply of real output. There can be many reasons for such excess monetary demand:
1. Increase in Public Expenditure. There may be an increase in the public expenditure (G) in excess of public revenue. This might have been made possible (or rendered necessary) through public borrowings from banks or through deficit financing, which implies an increase in the money supply.
2. Increase in Investment. There may be an increase in the autonomous investment (iI in firms, which is in excess of the current savings in the economy. Hence, the flow of total expenditure tends to rise, causing an excess monetary demand, leading to an upward pressure on prices.
3. Increase in MPC. There may be an increase in the marginal propensity to consume (MPC), causing an excess monetary demand. This could be due to the operation of demonstration effect and such other reasons.
4. Increasing Exports and Surplus Balance of Payments. In an open economy, an increasing surplus in the balance of payments also leads to an excess demand. Increasing exports also have an inflationary impact because there is generation of money income in the home economy due to export earnings but, simultaneously, there is reduction in
the domestic supply of goods because products are exported. If an export surplus is not balanced by increased savings, or through taxation, domestic spending will be in excess of the value of domestic output, marketed at current prices.
5. Diversification of Goods. A diversion of resources from the consumption goods sector either to the capital goods sector or the military sector (for producing war goods) will lead to an inflationary pressure because while the generation of income and expenditure continues, the current flow of real—output decreases on account of high gestation period involved in these sectors. Again, the opportunity cost of war goods is quite high in terms of consumption goods meant for the civilian sector. This leads to an excessive monetary demand for the goods and services against their real supply, causing the prices to move up.
In short, it is said that the demand-pull inflation could be averted through deflationary measures adopted by the monetary and fiscal authorities. Thus, passive policies are responsible for demand-pull inflation.
b. Cost-Push Inflation
A group of economists hold the opposite view that the process of inflation is initiated not by an excess of general demand but by an increase in costs, as factors of production try to increase their share of the total product by raising their prices. Thus, it has been viewed that a rise in prices is initiated by growing factor costs. Therefore, such a price rise is termed as “cost-push” inflation as prices are being pushed up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage inflation process. It is believed that wages constitute nearly seventy per cent of the total cost of production. This is especially true for a country like India, where labour intensive techniques are commonly used. Thus, a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level, because fundamentally, prices are based on costs. It has been said that a rise in wages causing a rise in prices may, in turn, generate an inflationary spiral because an increase would motivate the workers to demand higher wages. Indeed, any autonomous increase in costs, such .1S a rise in the prices of imported components or an increase in indirect taxes (excise duties, etc.), may initiate a cost-push inflation. Basically, however, it is wage-push pressures which tend to accelerate the rising price spiral.
Cost-push inflation may occur either due to wage-push or profit-push. Cost-push analysis assumes monopoly elements either in the labour market or in the product market. When there are monopolistic labour organizations, prices may rise due to wage-push. And, when there are monopolies in the product market, the monopolists may be induced to raise the prices. In order to fetch high profits. Then, there is profit-push in raising the prices. However, the cost-push hypothesis rarely considers autonomous attempts to increase profits as an important inflationary element. Firstly, because profits are generally a small fraction of the total price, a rise in profits would have only a slight impact on prices. Secondly, the monopolists generally hesitate to raise prices in absence of obvious demand-pull elements. Finally, the motivation for profit-push is weak since, at least in corporations, those who make the decision to raise prices are not the direct beneficiaries of the price increase. Hence cost-push is generally conceived as a synonymous with wage-push. When wages are pushed up, cost of production increases to a considerable extent so that prices may rise. Since wages are pushed up by the demand for high wages by the labor unions, wage-push may be .equated with union-push. According to one variant of the cost-push theory, sectoral shifts in demand are prime-movers in the inflationary process. Starting with an autonomous shift in demand, a rise in wages and prices could result in one sector and this rise could elicit further shifts of demand. This happens because there is a close link between different goods through inputs. One good serves as an input in the production of the other goods, and consequently, when the price of the input rises, the prices of output will also rise. For instance, when due to a rise in wages in the steel industry, price of steel may rise, and this will raise the prices of vehicles, machines, etc., using Steel as input. The rise in the prices of vehicles may in turn raise the cost of transport and manufactured goods. Similarly, prices of tractors, etc. may increase due to high prices of steel so that costs of agriculture may raise, hence food and raw material prices will also rise. All these ultimately raise the cost of living, leading to increase in wage rates. Thus, inflation once sets in motion due to the phenomenon of cost-push in one industry or sector spreads throughout the economy.