What Is Inflation? Meaning, Types, Causes and More

Inflation is an indicator that reflects the rate of increase in the cost of goods and services in the economy. Inflation is measured as a percentage that indicates the rise or fall in the prices from the previous period.

In this article, we will discuss all about inflation- its meaning, types, causes, etc.

Inflation is the quantitative economic indicator that measures the change in the prices of goods and services in an economy over a period of time. It indicates the average rise or fall in the prices of specific goods and services. Inflation essentially reflects the decrease in the purchasing power of the economy.

Inflation can be classified into 3 types- demand-pull, cost-push and built-in inflation.

• Demand-pull inflation:

  Here, the demand for goods and services is more than the economy’s production capacity. This shortage leads to an increase in prices.

• Cost-push inflation:

  Here, the rise in the price of goods and services is due to the increase in the cost of production. This includes the cost of labour, raw materials, etc.

• Built-in inflation:

  This occurs when there is an expectation of future inflations. An increase in the cost of goods and services leads to an increase in wages due to the inflated cost of living. This in turn will result in an increase in the cost of production, impacting the pricing of the product. Hence, the circle continues.

Also read: India's Retail Inflation Seen At A Five-Month High In September

Some of the key causes of inflation are discussed below:

• Monetary policy:

  The monetary policy decides the supply of currency in the economy. An excessive supply of currency can lead to inflation and decrease the value of the currency.

• Fiscal policy:

  The fiscal policy measures the economy’s borrowings and spending. Higher debts can lead to an increase in taxes and the printing of additional currency to repay the debt, causing inflation.

• High demand:

  As we discussed earlier, a shortage in supply as compared to the demand for the products can lead to an increase in prices.

Inflation can be positive for some while negative for others, depending on the kind of assets they hold. For example, people who own real estate or commodities will benefit from inflation as the price of their assets is set to go up. On the other hand, those with cash holdings may not be happy with inflation as it decreases the value of their holdings.

In India, two main indices are used to measure inflation- the wholesale price index (WPI) and the consumer price index (CPI). The CPI measures the change in the cost of consumer goods and services like food, electronics, education, medical care, etc. The WPI takes into account the prices of goods and services that are sold by one business to another for further sales.

The inflation rate in a country is measured by the central governing authority of the country, which is responsible for setting measures for the smooth functioning of the economy. In India, the inflation rate is measured by the Ministry of Statistics and Programme Implementation.

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Suggested Read: The Crazy Rich Indian's Guide To Inflation