What is Inflation?
Inflation refers to a situation of the consistent increase in the general price level of goods and services, in the economy, over a time period. And, if that type of situations comes on any country then, it will be called Inflation.
- It implies increases in prices
- It leads to falling in purchasing power of money (Decrease in real value of money)
- The same amount of money can buy fewer goods.
- The real value of existing savings declines.
Types of Inflation:
1. Cost-push inflation:
When the costs of producing or increasing the production of products are increased and because of which inflation happens, it is called Cost Pull Inflation.
This can have two conditions:
- When ‘supply’ decreases considerably against the ‘demand’.
- When the demand exceeds and the supply remains the same.
Thus either demand increases or supply decreases. In both cases, the price will increase and inflation will increase.
2. Demand-pull Inflation:
- When there is an increase in prices due to the imbalance in demand and supply of goods and services, it is called Demand-Pull Inflation.
- Increase in production value is due to many reasons. Such as the increase in raw material prices, an increase in wages, transportation charges and an increase in electricity rates etc.
- Demand > Supply = Shortage of goods and services leading to increasing prices.
- To control this kind of boom, the government offers a variety of tax exemptions.
3. Excess Printing and Flow of Money
- When the supply of money is increased without the increase in production, in this situation and people have more money than before, whereas the production remains the same as before.
- In such a state, because people have more money, they want to buy more things, which leads to an increase in demand.
- On the other hand, due to the production limit, the supply does not increase, resulting in inflation.
How to Control
1. To Increase Production or Supply
- When you in Production or Supply then Demand-pull get in control.
- That means if it is lacking in the supply of commodities, then in this situation, the government can either control the inflation by either increasing production or by importing that item from outside.
- Such efforts have been made by the government to meet the shortage of pulses and onions in India.
- However, import is the only solution for the short duration. To keep inflation under control for a long time, production of that item in the country is the last option.
2. To Decrease Production Cost
- When the Production Cost decreases, the Cost-Pull will be decreased.
- Under this, the government reduces the various tax rates on those products, so that its value is reduced and inflation is in control.
- Apart from this, the cost of goods may also be reduced due to improved technology, strong transport system etc.
- Such efforts were made by the Indian government in 2003 when prices of crude oil and steel had gone up.
3. Monetary Measure
- Under this, the Reserve Bank of India reduces the flow of currency by changing the monetary policy.
- During this process, the Reserve Bank of India enhances various rates, rates, SLRs, bank rates, repo rates, so that the bank loan can be expensive for the people.
- This reduces the purchasing of commodities by reducing the money due to which the demand in the market decreases.
- Due to this demand, the purchase of commodities is declining due to which the companies reduce the prices of their products so that people can buy it. Thus the price of commodities decreases and rupees expansion is in control.
So, these are the different types of Inflation and some of its effects. It is a very serious problem for any country. Therefore, the citizens of that country should be ready for getting settled into this type of situation. Therefore, if you keep in mind the suggestion of controlling the above inflation, then maybe you get rid of the situation.