Inflation is commonly understood as a situation of substantial and rapid general increase in the price level and consequent fall

the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy. The behavior of general prices is measured through price indices. The trend of price indices reveals the course of inflation or deflation in the economy. Crowther defines inflation as a state in which the value of money is falling, ie., prices are rising. Professor Samuelson defines Inflation occurs when the general level of prices and costs is rising. Types of Inflation. On different grounds, economists have classified inflation into various types. According to the rate inflation there are four types of inflation.

Moderate Inflation Running Inflation Galloping Inflation Hyper Inflation Moderate inflation 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 annual inflation rate, it is considered to be moderate inflation in the present day economy. It does not disrupt the economic balance. It is regarded as stable inflation in which the relative prices do not get far out of line. 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. When prices are rising at double or triple digit rates of 20,100 or 200 per cent a year, the situation may be described as galloping inflation. Galloping inflation is really a serious problem. It causes economic distortions and disturbances. In the case of hyper inflation prices rise is very severe. 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 per cent times. Hyper inflation is a monetary disease. Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull Inflation and Cost Push Inflation.

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. It is also called excess-demand inflation. In the excess-demand theories of inflation, excess demand means aggregate real demand for output in excess of maximum feasible, or potential, or full employment, output (at the going price level). 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. 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 are Increase in Public Expenditure. Increase in Investment. Increase in money supply. Cost Push Inflation: Cost push inflation or cost inflation is induced by the wage-inflation process. This is especially true for a Country like India, where labour intensive techniques are commonly used. Theories of cost-push inflation (also called sellers or mark-up inflation) came to be put forward after the mid-1950s.They appeared largely in refutation of the demand-pull theories of inflation and three important common ingredients of such theories are 1) that the upward push in costs is autonomous of the demand conditions in the concerned market 2) that the push forces operate through some important cost component such as wages, profits (mark up), or materials cost. Accordingly, cost-push inflation can have the forms of wage-push inflation, profit-push inflation, material-cost push inflation, or inflation of a mixed variety in which several push factors reinforce each other and that the increase in costs is passed on to buyers of goods in the form of higher prices, and not absorbed by producers. 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 arise in prices may , in turn , generate an inflationary spiral because an increase would motivate the workers to demand more wages. Measures to Control Inflation Inflation should be controlled in the beginning stage, otherwise it will take the shape of hyper-inflation which will completely run the country. The different methods used to control inflation are known as anti-inflationary measures. These measures attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary rise in prices is due to an excess of demand over a given supply of goods and services.

Read more: Economic Policies to Control Inflation Anti-inflationary measures are of four types: 1. Monetary policy 2. Fiscal policy 3. Price control and rationing 4. Other methods 1. Monetary Policy It is the policy of the central bank of the country, which is the supreme monetary and banking authority in a country. The central bank may use such methods as the bank rate, open market operations, the reserve ratio and selective controls in order to control the credit creation operation of commercial banks and thus restrict the amounts of bank deposits in the country. This is known as tight money policy. Monetary policy to control inflation is based on the assumption that a rise in prices is due to a larger demand for goods and services, which is the direct result of expansion of bank credit. To the extent this is true, the central banks policy will be successful. 2. Fiscal Policy It is the policy of a government with regard to taxation, expenditure and public borrowing. It has a very important influence on business and economic activity. Taxes determine the size or the volume of disposable income in the hands of the public. The proper tax policy to control inflation will avoid tax cuts, introduce new taxes and raise the rates of existing taxes. The purpose being to reduce the volume of purchasing power in the hands of the public and thus reduces their demand. A precisely similar effect will be achieved if voluntary or compulsory savings are increased. Savings will reduce current demand for goods and thus reduce the inflationary rise in prices. As an anti-inflationary measure, government expenditure should be reduced. This indicates that demand for goods and services will be further reduced. This policy of increasing public revenue through taxation and decreasing public expenditure is known as surplus budgeting. However, there is one important difficulty is this policy. It may be easy to increase revenue in times of inflation when people have more money income, but difficult to reduce public expenditure. During war times as well as during a period of development, it is absolutely impossible to reduce the planned expenditure. If the government has already taken up a scheme or a group of schemes, it is ruinous to give them up in the middle. Therefore, public expenditure cannot be used as an antiinflationary measure. Lastly, public debt, i.e., the debt of the government may be managed

in such a way that the supply of money in the country may be controlled. The government should avoid paying back any of its previous loans during inflation so as to prevent an increase in the circulation of money. Moreover, if the government manages to get a surplus budget, it should be used to cancel public debt held by the central bank. The result will be anti-inflationary since money taken from the public and commercial banks is being cancelled out and is removed from circulation. But the problem is how to get abudget surplus, which is extremely difficult. 3. Price Control and Rationing This is the most important and effective method available during war and other critical times particularly because both monetary and fiscal policies are more or less useless during this period. Price control implies the establishment to legal upper limits beyond which prices of particular goods should not rise. The purpose of rationing, on the other hand, is to distribute the goods in short supply in an equitable manner among all people, irrespective of their wealth and social status. Price control and rationing generally go together. The chief objection behind use of this method to fight inflation is that they restrict the freedom of the consumers and thus limit their welfare. Besides, its success depends on administrative efficiency, which in many underdeveloped countries is very low. 4. Other Methods 1. Another important anti-inflationary device is to increase the supply of goods through either increased production or imports. Production may be increased by shifting factors of production from the production of less inflation sensitive goods, which are in comparative abundance to the production of those goods which are in short supply and which are inflation-sensitive. Moreover, shortage of goods internally may be relieved through imports of inflation sensitive goods, either on credit or in exchange for export of luxury goods and other non-essentials. 2. A word may be added about the measures to control cost-push inflation. It is suggested that wages, salaries and profit margins should be controlled and fixed through a system of income freeze. Business units may particularly welcome wage freeze. However, wage freeze is not so easy or just, unless trade unions agree to the proposal and there is also freezing of prices. At the same time, the Government should not raise the rates of commodity taxes. Thus, it is difficult to control cost push inflation through controlling wages and other incomes. The best method is to bring a rapid increase in production, which will automatically check prices and wages also.