Tuesday 30 October 2012

Four Major Types of Inflation

When there is a rise in general price level for all goods and services, it is known as inflation. An inflationary situation could be because of the rise in any single price or a group of prices of related goods and services.

Four Major Types of Inflation

Demand-pull Inflation

This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called demand-pull inflation. This type of inflation affects the market economy adversely during the wartime. For instance, if a play is staged and it becomes popular, the cost of the tickets for the next show will increase.

Cost-push Inflation

As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the per-unit cost of production and this would lead to rise in prices for the related products. This type of inflation may or may not occur in conjunction with demand-pull inflation.

Pricing Power Inflation

Pricing power inflation is more often called administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the prices of their respective goods and services to increase their profit margins. Pricing power inflation does not occur at the time of financial crises and economic depression or when there is a downturn in the economy. This type of inflation is also called oligopolistic inflation because oligopolies have the power of pricing their goods and services at whatever levels they want.

Sectoral Inflation

This is the fourth major type of inflation. The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares also go up. This leads to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn.

Other Types of Inflation

Fiscal Inflation

Fiscal Inflation occurs when the government is spending much more than what is actually available. This situation occurs when the budget that is allotted is deficit. For instance, America faced fiscal inflation when George W. Bush was the President, due to heavy spending on defense.


Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a country's monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rates touched approximately 322 percent per month with October being the month of highest inflation.

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