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Inflation and Deflation
Inflation and Deflation

Meaning of inflation

            Friedman has defined inflation as “Inflation is always and everywhere a monetary phenomenon and can be produced only by a more rapid increase in the quantity of money than output.” But economists do not agree that money supply alone is the reason of inflation. As per Hicks, “Our current problems are not of a monetary character.”

            Economists hence define inflation in terms of a continuous rise in prices. Johnson defines “inflation as a sustained rise” in prices. Brooman defines it as “a continuing increase in the general price level.”

            Shapiro defines as “as a persistent and appreciable rise in the general level of prices.”

Let us see an illustration which explains us to calculate the inflation rate of any nation at any point of time in the year and that helps in comparing between years.

Illustration 59

The below given tablet represents, the whole sale price index of a nation to the corresponding years. You are required to compute the inflation rate prevailing for the respective years.

Year

Wholesale Price Index (WPI)

2005-2006

326

2006-2007

336

2007-2008

348

2008-2009

362

2009-2010

386

Solution

Year

Wholesale Price Index (WPI)

ΔP(t)   x  100
      P(t-1)

Inflation Rate in (%)

2005-2006

326

-

-

2006-2007

336

336 – 326   x 100
326

3.1

2007-2008

348

348 – 336  x  100
336

3.6

2008-2009

362

362 – 348  x  100
348

4.0

2009-2010

386

386 – 362  x  100
362

6.6

(Values rounded of to nearest percentage)

Diverse Types of Inflation

  • Sneaking Inflation

When the rise in prices is very less like that of a small or sneaky it is termed sneaky inflation. In terms of speed continued hikes in prices of annual rise of less than 3 percent per annum is characterised as sneaking inflation. Such a rise in prices is regarded safe and essential for fiscal development.

  • Walking or jogging Inflation

When prices rise moderately and the annual inflation rate is a single unit, it is otherwise known as the rate of rise in prices is in the transitional range of 3 to 7 percent annum or less than 10 percent. Inflation at this rate is warning signal for the government to control it before it turns into running inflation.

  • Consecutive Inflation

When prices increase fast, at a rate of speed of 10 to 20 % per annum it is termed as consecutive inflation. Such inflation affects the deprived and middle classes unfavourably. Its control requires strong monetary and fiscal measures otherwise it tends to hyper inflation.

  • Twitchy Inflation

    • When prices rise very rapidly at double or triple digit rates from more than 20 to 100 percent per annum or more, it is usually called runaway called runaway or hurtling inflation.

    • It is also characterised as hyper inflation by definite economists. In reality, twitchy inflation is a condition when the rate of inflation becomes immeasurable and completely uncontrollable.

    • Prices increase many times every day. Such as condition brings a total crumple of fiscal system for the reason that the incessant drop in purchasing power of money.

    • The speed with which prices is likely to increase is demonstrated in the diagram below. The curve S represents sneaking inflation when within a period of ten years the price level has been represented to have increased by about 30%.

    • The curve W shows walking or jogging inflation when the price increased by more than 50 percent during 10 years.

    • The curve C shows Consecutive inflation depicting a rise of about 100 percent in ten years.

    • The precipitous curve T depicts the path of Twitchy inflation when prices increased by more than 120 percent in less than one year.

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