Inflation – Causes, Types & Control Measures

Almost every economy experiences inflation – a sustained rise in general price level.

1. Meaning of Inflation

Inflation is a sustained rise in the general price level of goods and services over a period of time, resulting in fall in purchasing power of money.

2. Types of Inflation (by Rate)

• Creeping inflation – mild, up to about 3% per year.
• Walking inflation – moderate, about 3–7% per year.
• Running inflation – high, about 7–20% per year.
• Galloping / Hyper inflation – extremely high, more than 20–30% (sometimes hundreds or thousands of percent).

3. Causes of Inflation

(a) Demand-pull Inflation

• Excess aggregate demand over available supply.
• Causes:
  • Rise in consumption and investment spending.
  • Increase in government expenditure.
  • Expansionary monetary policy (more money supply, low interest rates).

(b) Cost-push Inflation

• Increase in cost of production pushes prices up.
• Causes:
  • Rise in wages without rise in productivity.
  • Increase in raw material prices (oil shock).
  • Higher indirect taxes.

4. Effects of Inflation

• Losers: fixed income groups, savers (if interest rate < inflation), creditors.
• Gainers: borrowers (repay in cheaper money), owners of real assets.
• Creates uncertainty for business planning.

5. Control Measures

(a) Monetary Measures

• Tight monetary policy – higher interest rates.
• Reducing credit growth.

(b) Fiscal Measures

• Reduce government expenditure.
• Increase taxes to reduce disposable income.

(c) Direct Controls

• Price controls and rationing (in extreme cases).
• Import liberalisation to reduce domestic shortages.

6. Quick Revision Points

• Inflation = sustained rise in general price level.
• Types by rate: creeping, walking, running, galloping.
• Main causes: demand-pull and cost-push.
• Control: combination of monetary, fiscal and direct measures.

7. Quiz Time 🎯