What is Inflation and what are the types of Inflation?

What is Inflation

 A persistent increase in a country's average level of prices for goods and services is referred to as inflation, and it is quantified as an annual percentage change. When there is inflation, things cost more money over time. To put it another way, as inflation increases, a smaller portion of a good or service may be purchased with each rupee you hold. Inflation occurs when prices increase or, conversely, when the value of money decreases. The purchasing power of a rupee refers to how many real, observable items or genuine services one rupee can currently purchase. The purchasing power of money decreases as inflation increases. Theoretically, a Rs. 20 pen will cost Rs. 20.02 in a year, for instance, assuming inflation is 2% per year. Your rupee does not purchase as much after inflation as it once did.

Types of Inflation

Galloping Inflation: Mild inflation may take on the characteristics of galloping inflation if it is not controlled and becomes uncontrollable. Galloping inflation is defined as inflation that is double- or triple-digit, or 20, 100, or 200 percent annually. Inflation rates in many Latin American nations, including Argentina and Brazil, ranged from 50 to 700 percent annually throughout the 1970s and 1980s.

Hyperinflation: A period of extremely high inflation. While economies appear to be able to withstand galloping inflation, when the cancer of hyperinflation strikes, a third and fatal strain takes root. A market economy where prices are increasing by a million or even a trillion percent annually cannot be praised. When prices spiral out of control and the monetary authorities are powerless to enforce any controls, hyperinflation results. In the 1920s, Germany experienced hyperinflation.

Creeping Inflation: The term "creeping inflation" can also refer to moderate or mild inflation. This kind of inflation happens when the price level climbs steadily over time at a slow rate. It is thought to be a mild inflation when the yearly inflation rate is less than 10% or in the single digits.

Stagflation: Stagflation is an economic condition where demand stagnates for an extended period of time due to increased unemployment and inflation. Since historically there is an inverse relationship between unemployment rates and inflationary pressures, this is actually a sign of an inefficient market. Developed nations experienced stagflation throughout the 1970s as a result of the sharp increase in global oil prices.

Relationship of Inflation and the Supply of money

The majority of economists agree that the money supply, also referred to as the total amount of money in an economy, and inflation rates are directly related. Since inflation can be easily influenced by other factors as well, it is far from simple or predictable to understand the relationship between money supply and inflation. Depending on the sort of economic theory utilized, the connection between the money supply and inflation is explained in a variety of ways. The relationship is stated as MV=PT, or Money Supply (the amount of money in circulation) x Velocity of Circulation (the speed at which money circulates throughout the economy)=Price Level x Transactions or Output, under the quantity of money theory, often known as monetarism. This theory assumes that the Velocity and Transactions are constants and that the connection between supply and pricing is therefore one of direct proportionality. Money supply is represented by MV, and money demand is represented by PT. Price level varies in direct proportion to the amount of money, if V and T are constant. There will be inflation or a rise in prices if the money supply rises. While the money supply and inflation continue to be related in Keynesian theory, other significant factors can also have a significant impact on inflation and prices. In general, the Keynesian theory emphasizes the link between overall or aggregate demand and variations in inflation.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.-Ronald Reagan

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