Page 92 - DMGT401Business Environment

Unit 3: Economic Environment of Business

3.5.1 Types of Inflation Notes

The following are the types of inflation:
1. Hyperinflation: An extremely high rate of inflation is known as hyperinflation. It is a state
of galloping inflation. N. Gregory Mankiw has defined Hyperinflation as "inflation that
exceeds 50% per month, which is just over 1% over per day. Compounded over many
months, the rate of inflation leads to very large increases in the price level".
2. Suppressed Inflation: Suppressed inflation is a situation where deliberate policies are
pursued to prevent price rises in the present, but it is only a temporary suppression of
inflation. These forces usually accumulate and are bound to burst in future and occasionally
result in hyperinflation.
3. Deflation: This means a fall in prices, the opposite of inflation.

4. Disinflation: It refers to the slowing of the rate of inflation, that is, prices are still rising,
but at a slower rate than before. It implies the process of bringing down prices moderately
from their previous higher level.
5. Reflation: It is a term used to denote inflation after a period of deflation, meaning inflation
designed to restore prices to a previous level.
6. Crawling Inflation: Crawling inflation is where inflation is low and which moves up and
down slowly.

In controlled economies like India, there exist another type of inflation, i.e., Administered
Inflation. In a few sectors, India still follows a policy of administered pricing and in some cases,
it follows dual pricing in which the manufacturer has to sell a portion of the output at fixed
prices while the rest are sold at market driven prices. India also follows the policy of support
price for crops. All these administered prices changes from time to time create administered
inflation i.e. rise in prices not by market forces but by the government. Though in today's
liberalised economy, the government is slowly doing away with administered pricing.

Based on its cases or sources, we can identify three kinds of inflation:
1. Administered Pricing: Inflation caused by the revision of prices by the government.
2. Demand Pull Inflation: Demand-pull inflation arises when aggregate demand outpaces
aggregate supply in an economy. It involves inflation rising as the real gross domestic
product rises and unemployment falls. It is described as "too much money chasing too few
goods", since only money that is spent on goods and services can cause inflation.
3. Cost Pull Inflation: This is because of rise in costs. Cost-push inflation or supply-shock
inflation is a type of inflation caused by large increases in the cost of important goods or
services where no suitable alternative is available.

Example: A situation of this kind that has been often cited was the Oil Crises of the
1970s, which some economists see as a major cause of the inflation at that moment. Since
petroleum is critically important to economies, a large increase in its price can lead to increase
in prices of most products, raising the rate of inflation.
Neo Keynesian theory describes three types of inflation: Demand-Pull Inflation, Cost-Pull
Inflation, and Built-in Inflation.
Built-in Inflation: Built-in inflation is induced by adaptive expectation, often linked to the
'price/wage spiral' because it involves workers trying to match their wages up with prices, and
employers passing higher costs on to consumers as higher prices as part of a 'vicious circle'.

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