LEMMENJOKI

Inflation, Stages And Types Of Inflation

When the prices of goods along with services increase, inflation occurs. There are many types of inflation such as creeping, walking, galloping and hyperinflation. There are also specific asset and wage inflation. Mentioned below are the stages and different types of inflation.

What Are The Different Stages Of Inflation?

Inflation will pass through three different stages. The three stages of inflation are described below:

  • The Pre-Full Employment Stage: 

In the first stage, there occurs a rise in the price level. It is less than proportionate to the supply of money’s increase. If the supply of money increases by 10%, so there will be an immediate price level rise. Hence the production of goods as well as services receives some stimulus. Because of this increase in the goods and services output, the price level will fall. But if again there is an increase by 10% in the supply of money, there will be a rise in the price level. This will encourage good as well as services production in the economy. Thus if there occurs continuous increase in the money supply, a stage will be seen when the goods as well as services output may not be increasing in the same proportion in which there is an increase in the supply of money. The reason is that with production expansion, there is a decline in the supply of the production factors.

  • The Full Employment Stage:

 If without any disturbance, the supply of money keeps on increasing, then there the production will stop to increase after some time. The production will be becoming stagnant. The only reason is that each and every productive resources are completely employed then. Additional resources are unavailable for further production expansion. Hence the further production expansion ends. Since the production becomes persistent, the price level will start to increase in the same proportion as there occur an increase in the supply of money.

  • The Post-Full Employment Stage:

If there is a continuous increase in the supply of money, even after that time of full employment, then for a certain time there will be an increase in the price level. It will be in the same proportion in which the increase takes place in the supply of money. But afterwards, the supply of money increases a lot that people loses confidence in it. Moreover the increase in the price level is high than that of supply of money. So if the supply of money is 10%, then there is an increase of 20-30% or may be even 40% in the price level. In this kind of a scenario, it is very difficult to examine the rise in the price level. This is known as the final stage of the inflation. There will be such a high rise in the price that there occurs a replacement of money exchange by commodity gradually.

What Are The Types Of Inflation?

The two main types of inflation are:

Demand Pull:

The most well known cause for inflation is the pressure that takes place due to the ever rising demand on a stagnant or may be less rapidly increasing goods and services supply. The expansion in total demand may be because of the private investment that increases rapidly or the expenditure of the expanding government related to war or development of the economy. Attempts are done for production expansion when the demand starts to expand and exert pressure on the prices. But this is not possible always either because of unavailability of any employed resource or scarcity of transport, capital, equipment and power. Expansion in the total demand after full employment level leads to an increase in the price level. Resources are being used for the growth, to create fixed assets as well as for consumer goods production. Large expenditure will be creating large income money and demand but without any corresponding increase in the real output supply.

Cost Push:

In some situations, the prices rise up due to increase in wages that are strained upon the economy by labor leaders under the threat of strike. Manufactures also cause a rise in the cost through a system that fixes a higher profit margin. The common people usually put the blame on profiteers, speculators as well as hoards or others for causing an increase in the cost along with the prices. The government is again considered responsible for increasing the costs by forcing new taxes as well as continuously increasing the rates of taxes related to the existing commodity. Hence the rising commodity taxes rates in the market of a seller will let the producers increase the prices by the complete tax amount. Under these conditions of rise in price, business as well as industrial unites will find it convenient to pass on the stress of increased wages to the consumers by making a price rise. Thus the increase in wages, margin of profit along with taxation will be held responsible for this cost push inflation.

So anyway, people are always affected by high rise of inflation. Rising rate of inflation is a failure sign of the part of the government.