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Types of Inflation
| Demand Pull Inflation This type of inflation is caused by excess demand or too much money over too few goods. For the economy as a whole, if aggregate demand exceeds supply, there will be pressure on prices to rise. Cost Push Inflation The sustained increase in prices that occur due to higher cost of production such as wages, materials, taxes, etc. If these costs increase and firms wish to maintain profits, they will raise prices. Imported Inflation Inflation due to rising cost of imports paid for firms or by consumers. Money Supply Inflation Excess money will result in too much money chasing too few goods. The high supply of money is mainly caused by easing monetary policy or lowering of interest rates in the economy. Expected Inflation If there is an expectation for prices to increase further, people will not tend to increase their demand for goods now. Hence, the excess demand will pull the price up. Other Classification of Inflation Hyperinflation This happens when inflation is rising at a very fast rate. Deflation When the general price level is falling. The opposite of inflation. Stagflation This happens when the economy is experiencing high inflation together with economic stagnation and high unemployment. |
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