Inflation

The term ’inflation’ is used in many senses and it is difficult to give a generally accepted, precise and scientific definition of the term. Popularly inflation refers to a rise in price-level or fall in the value of money. Kemmerer states that,” inflation is too much currency in relation to the physical volume of business being done”.

Coulburn defines inflation as, “too much money chasing too few goods”. The implication in these definitions is that prices rise due to an increase in the volume of money as compared to the supply of goods. They seek to establish cause and effect relationship between supply of money and the price-level. 

The cause effect relationship between supply of money and the price-level was reversed in Germany after the First World War. The rise in the price-level instead of being the result was actually the cause of the expansion of money supply in Germany in the post-war period. In other words, the hyper-inflation which took place in Germany in the post-war period could not be explained by the normal cause and effect relationship between supply of money and the price-level. It is in this context that Prof. Paul Einzig has drawn a distinction between ‘money inflation’ and ‘price inflation’. According to him, money inflation is the first stage of inflation in which the excess of money supply over business requirements pushes up the price-level. Price inflation is the second stage of inflation, when the rising price-level necessitates a rapid expansion of the supply of money. During price-inflation, the prices rise with such rapidity that even the money supply cannot keep pace with them. This stage of inflation is referred to as hyper-inflation. 

The definition discussed above look upon inflation as a purely monetary phenomenon. But, the Cambridge economists, including Prof. Pigou and Keynes have analyzed inflation as a phenomenon of full employment. According to Keynes, an inflationary rise in the price-level cannot take place before the point of full-employment. An expansion of money supply will not lead to a rise in the price-level so long as there are unemployed resources in the economy. An expansion of money supply, before the point of full-employment will increase output and employment, not the price-level. The price-level will increase only if the expansion of money supply is continued even beyond the point of full employment. According to Keynes, the rise in the price-level after the point of full employment is true inflation. It is possible for the price-level to rise even before the point of full-employment if there are certain bottlenecks in the expansion of output in the economy. But this rise in the price-level cannot be termed as true inflation. Prof. Keynes has referred to this as pre-full employment inflation as semi-inflation.