Page 198 - DECO402_Macro Economics

Unit-22: Inflation

its quantity, some economists have told the inflation of up to 3 percent per year in form of Notes
creeping inflation. According to many economists, slow increase in price levels is a necessary
condition for economic progress. Prices rising as a slow speed may provide motivation for
investment. They prevent the economy from falling in a stagnation trap.
b. Running Inflation: If slow creeping inflation is left uncontrolled for a long time, then increase
in price level will become more marked and alarming with time. It adopts to form of running
inflation. In such situation, prices rise with a fast rate of 8-10 percent per year. Running
inflation is a warning signal. At this stage, required necessary measures to stop inflationary
tendencies are important. If these steps are not taken on time then running inflation may,
through saving capacity and in this manner through reduction in long term investment
plans, may exterminate the economy.
c. Hyper Inflation: When monetary authorities lose control on running inflation, it is result
of hyper inflation. It is the last stage of inflation, where there is no limit of price rise. In this
stage, prices rise at a very high speed.
In hyper inflation, people expect the prices to rise more and hence become conscious of inflation and
they spend money at a very high rate, because of which circulation rate increases. Since people spend
on consumption at the cost of saving, hence lending from the savings is unsuccessful in supplying anti
inflationary resources for controlling inflation. Government has to take the help of deficit financing,
which is again inflationary.
Hyper inflation must be avoided at any cost. It creates a huge disorder in economic process. It may
put the very survival of present social and economic process in danger due to which widespread
experience of injustice and dissatisfaction arises.
The worst form of hyper inflation was seen during the period of civil war. Price rise was wobbling,
unless this war did not become ten lacs times of previous level. All forms of income and property lost
value overnight. This inflation destroyed thousands and lacs of people in Germany, even destroyed
the middle class of Germany.

2. On the Basis of Degree of Control

On the basis of degree of control, inflation may be classified in open and suppressed inflation.
a. Open inflation: Inflation is called open when prices increase continuously without any
obstacle or control. In words of Milton Friedman, "It is an inflationary process in which
prices are allowed to increase without stopping through governmental price control and
mixed techniques." At the end, it may end in hyper inflation. According to A.C. L. Dey, Open
inflation is initiated by some change, which makes it impossible to satisfy the whole of the
demand that may be forthcoming at existing prices resulting in initial price rise. Further,
rise in the prices is induced by the reactions of the transactors.
b. Suppressed inflation: Under such kind of inflation, though there are conditions of prices
rising, but by use of government policies like price control and rationing, price level is not
allowed to increase. Leaving a few abnormal conditions, where any inflationary pressure is
not building for the future, as soon as control measures are removed, prices may increase.
There are two meanings of suppressed inflation, means place of consumer spending and
deviation of demand.
When policies are executed for stopping present price rise then, suppressed inflation induces
postponement in consumption expense. During the period of war, for postponing the adverse effects
of price rise, government takes the support of rationing and other controls. Consequently, consumer
and firms collect savings, because they are incapable of buying those things, which they want at the
prevalent price or income levels. Pent up demand of the transactors is fulfilled by buying those goods

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