Question

The several variations on inflation?

Answer 1

Inflation is the rate of increase in price level of certain basket of goods and services over a particular period of time. It is expressed in percentage and indicates the reduction in purchasing power of a currency. A small rate of inflation is desirable since it promotes growth by encouraging the increase in output. Depending on the speed by which it rises, inflation can be classified in various categories. Inflation can also be particular to a certain asset class. Following are the more common types of inflation:
Creeping Inflation: When inflation rate is 3% or less, it is termed as creeping inflation. It is beneficial to the economic growth since it boosts demand, iraise output and income.
Walking Inflation: It happens when inflation rate is above 3% upto 10%. It starts making people uncomfortable and they start buying more than necessary fearing that prices will rise even more tomorrow, which leads to excess demand and heating up the prices out of reach of many people.
Galloping Inflation: It occurs if inflation rate is above 10%. Money starts losing value too fast for businesses and individual incomes to keep pace with it. Capital starts flowing out of the country. Economy becomes unstable and loses credibility with investors.
Hyperinflation: It happens when inflation rate shoots up above 50% a month. It is a rare condition and occurs due to unchecked printing of money by a country. It leads to complete colapse of the economy.
COre inflation: It measures rising price level of goods and services except food and energy owing to their price volatility. Monetory authority often uses core inflation to set monetory policy.
Wage inflation: It occurs when wages rise more than cost of living. It may happen because of shortage of labour or higher bargaining power of labour unions or for some other reason. It is part of cost push inflation which occurs when cost of factors of production (wages, rent, intrest) rises leading to increase in price of output. Other side of cost push inflation is demand pull inflation which occurs due to excess demand of goods and services.
Asset Inflation: Asset inflation is rise in price level in a particular asset class; housing, equity, gold etc. Policy makers often ignore asset inflation while making policies. However, inflation in an asset class can reak havoc on the economy as happened in 2008 subprime mortgage crisis.