Types of Inflation

There are several types of inflation's observable in an economy. These can be classified as under: 

1. Creeping, walking, running, and galloping inflation:

This classification is made on the basis of the” speed” with which the prices increase in the economy.

(a) Creeping inflation:

It is the mildest type of inflation. The government has sometimes to resort to creeping inflation to make the economy dynamic. This type of inflation serves as a tonic for a backward and underdeveloped economy. Here, prices rise slowly, industry and trade receive stimulus and the country slowly and gradually develops economically. It is on account of its stimulating effect that some economists welcome it for the economic development of a backward economy. But, some economists, look upon creeping inflation as potentially dangerous. Their view is that if proper control is not exercised over creeping inflation, it may assume alarming proportions with the lapse if time. 

They, therefore, suggest that creeping inflation must be controlled effectively in time before it is too late. It has been pointed out that the price-level rises approximately by 2% annually under creeping inflation. As such, creeping inflation may not be considered to be too dangerous for the smooth functioning of the economy. 

(b) Walking inflation:

The rate of the increase of the price-level acquires greater speed and rapidity under walking inflation. Roughly speaking, the price-level under walking inflation rises approximately by 5% annually. If proper control is not exercised over walking inflation in time, it can easily assume the form of running inflation. 

(c) Running inflation:

The rate of increase of price-level gets further accelerated under running inflation. The price-level under this type of inflation rises approximately by 10% every year. In case, the government fails to curb running inflation in time, it may easily develop into galloping inflation. 

(d) Galloping inflation or hyper-inflation:

In fact, this is the most dangerous type of inflation. Under this type of inflation, the prices rise every minute and there is no upward limit to which the price-level may rise in course of time. Lord Keynes has referred to this type of inflation as the true inflation. This type of inflation invariably occurs after the point of full-employment. Under this type of inflation the price-level rises approximately by 16% every year. There are two classic examples of galloping inflation in recent history. 

(i) The great inflation of Germany after the First World War and 

(ii) The great Chinese inflation after the Second World War. In both of these countries, the inflationary forces had assumed highly alarming proportions. 

The above explanation of inflation can also be represented by means of a diagram. In the diagram, the years have been represented on the X axis and the percentage increase in the price-level on the Y axis.

In the first period of 25 years, the prices of the commodities have gone up by 50%. The OA line represents creeping inflation. In the second period of 10 years, the prices have gone up 50% and AB line in the above diagram denotes walking inflation. In the period of 5 years, the prices again shoot up by 50% and the BC line shows running inflation. In the same manner, the prices rise by 50% in the fourth period within three years, the line CD represents galloping inflation. Thus, in a total period of 43 years, all the four types of inflation take place in succession and the price-level rises by 200% during the entire period. 

2. Comprehensive and sporadic inflation:

Comprehensive inflation occurs when the prices of all the commodities register a rise in the economy. Sporadic inflation, on the other hand, is sectoral inflation. Under this type of inflation, the prices of all the commodities do not register a rise. Only the prices of a few commodities show an upward trend. 

3. Open and repressed inflation:

Inflation can also be classified into open and repressed inflation according to the government’s reaction to the presence of inflationary pressures in the economy. 

(a) Open inflation:

Inflation is said to be open when the government takes no steps to check the rise in the price-level. Open inflation is allowed to continue unchecked without any attempt on the part of the government to hold the price-line. Under open inflation, the market mechanism is allowed to work itself out of fully, without restrictions being imposed by the government. The market mechanism is left free to distribute resources amongst the various industries. If there is any shortage of any particular resource the market mechanism would inevitably raise its price and allocate it to those uses and industries which can afford to pay a higher price for it. Thus, the market mechanism performs its classic function of distributing scarce factors among competing industries. The hyper-inflation experienced by Germany after the First World War is an eloquent open inflation. 

(b) Repressed inflation:

Inflation may be said to be repressed, when the government actively intervenes to check the rise in the price-level by resorting to price-control and rationing of scarce items in the economy. It is on account of this that repressed inflation invariably results in such evils as profiteering, black-marketing, hoarding and corruption on a large-scale. This may also lead to the diversion of economic resources from the more essential to the less essential industries. The reason is that, the price-mechanism under repressed inflation is not allowed to function freely. The prices of essential goods are statutorily fixed, while those of non-essential goods are left free and uncontrolled. The margin of profit being higher in non-essential goods, the economic resources are bound to be diverted to the production of such goods to the detriment of the community. 

4. Full inflation and partial inflation:

Prof. Pigou has classified inflation into (i) Full-inflation and (ii) partial inflation. According to Prof. Pigou, the price-level consequent upon the expansion of money supply in the pre-full employment stage is referred to as partial inflation. There is only a slight increase in the price-level under partial inflation. There is only a slight increase in the price-level under partial inflation. The increase in the supply of money goes to mobilize the idle resources in the economy. This results in an increase in the volume of employment in the economy. Thus, the increase in the supply of money before the point of full-employment goes to increase the volume of output and employment rather than the price-level. 

But the increase in the supply of money after the point of full-employment (because there already exists full employment of resources in the economy), but leads to a sharp uninterrupted rise in the price-level. Such a situation is referred to as the situation of full inflation. 

5. Peacetime, wartime and post-war inflation:

This classification of inflation has been done on the basis of ‘time’. By peace-time inflation, is a rise in the price-level during peace-time. This type of inflation is very often the result of increased governmental expenditure on ambitious development projects in the economy. Such inflation very often occurs during a period of planned economic development in backward and underdeveloped countries. 

Wartime inflation, on the contrary, arises during a period of war. Modern wars, as is well-known are very expensive as the government spends huge amount of money on their successful prosecution. During wartime, the increase in the output of goods and services does not keep pace with the expansion of money supply. An inflationary gap inevitably emerges which results in a rising price-level. 

Post-war inflation generally takes place immediately after the cessation of hostilities, when the pent-up demand finds open expression on the relaxation of price and physical controls by the government. The rise in the price-level under post-war inflation may even be more rapid than during war-time. 

6. Currency inflation and credit inflation:

Inflation may also be classified on the basis of the ‘factors’ which cause this phenomenon 

(a) Currency inflation:

This is the classic type of inflation marked by an excess supply of money in relation to the available output of goods and services. Since excessive supply of money is confronted with a limited supply of goods and services it inevitably results in an inflationary rise in the price-level. This type of inflation generally occurs during war. 

(b) Credit inflation:

Sometimes the government encourages an expansion of credit without expanding the supply of money in circulation. This is known as credit inflation.